**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**


**FORM
      10-KSB**




(Mark
      One)




x  ANNUAL
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For
      the
      fiscal year ended: DECEMBER 31, 2007





o  TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For
      the
      transition period from ______________ to ______________





Commission
      File Number: 0-13092





**SPECTRASCIENCE,
      INC.**


(Development
      Stage Enterprise)





(Name
      of
      small business issuer in its charter)




MINNESOTA
              
              41-1448837(State
                  of incorporation)
              
              (I.R.S.
                  Employer Identification No.)


11568-11
                      Sorrento Valley Road, San Diego, CA
                
                92121(Address
                      of principal executive offices)
                
                (Zip
                      Code)




Issuer’s
      telephone number: (858) 847-0200





Securities
      registered under Section 12(b) of the Exchange Act: NONE





Securities
      registered under Section 12(g) of the Exchange Act:


COMMON
      STOCK, $0.01 PAR VALUE


(Title
      of
      Class)





Check
      if
      the issuer is not required to file reports pursuant to Section 13 or 15(d)
      of
      the Exchange Act. o





Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 12 months (or for such shorter period
      that the registrant was required to file such reports), and (2) has been subject
      to such filing requirements for the past 90 days.


YES
x NO
      o










Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B contained in this form, and no disclosure will be contained,
      to
      the best of registrant’s knowledge, in definitive proxy or information
      statements incorporated by reference in Part III of this Form 10-KSB or any
      amendment to this Form 10-KSB. x





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).


Yes 
      o No x




Issuer’s
      revenues for each of its fiscal years ended December 31, 2007 and 2006 were
      $0
      and $0, respectively.





As
      of
      March 27, 2008, the number of outstanding shares of the Registrant’s Common
      Stock, par value $0.01 per share, was 67,608,372. The aggregate market value
      of
      the voting stock held by non-affiliates of the registrant was approximately
      $29,636,000 based on the last reported sale price of $1.04 on December 31,
      2007.
      (Symbol SCIE:OB)





**ISSUERS
      INVOLVED IN BANKRUPTCY**


**PROCEEDINGS
      DURING THE PAST FIVE YEARS**





Check
      whether the issuer has filed all documentation and reports required to be filed
      by Sections 12, 13 or 15(d) of the Exchange Act after the distribution of
      securities under a plan confirmed by a court. Yes x No
      o




**DOCUMENTS
      INCORPORATED BY REFERENCE**





Portions
      of the registrant’s proxy statement for its annual meeting of stockholders in
      May 2008 are incorporated in Part III of this report on Form
      10-KSB.





Transitional
      Small Business Disclosure Format (Check one): Yes  o   No x




2


**SPECTRASCIENCE,
      INC.**


(A
      Development Stage Enterprise)





**FORM
      10-KSB**


**For
      the Fiscal Year Ended December 31, 2007**





TABLE
      OF
      CONTENTS




PagePART
                  I
              
              
              4Item
                  1. Description of Business
              
              
              4Item
                  2. Description of Property
              
              
              20Item
                  3. Legal Proceedings
              
              
              20Item
                  4. Submission of Matters to a Vote of Security Holders
              
              
              20PART
                  II
              
              
              21Item
                  5. Market for Common Equity and Related Stockholder Matters and
                  Small
                  Business Issuer
                Purchases of Equity Securities
              
              
              21Item
                  6. Management's Discussion and Analysis or Plan of
                  Operation
              
              
              22Item
                  7. Financial Statements
              
              
              40Item
                  8. Changes in and Disagreements with Accountants on Accounting
                  and
                  Financial Disclosure
              
              
              59Item
                  8A. Controls and Procedures
              
              
              59Item
                  8A(T). Controls and Procedures
              
              
              60Item
                  8B. Other Information
              
              
              61PART
                  III
              
              
              62Item
                  9. Directors and Executive Officers. Promoters and Control Persons
                  and
                  Corporate Governance;
                Compliance
                  with Section 16(a) of the Exchange Act
              
              
              62Item
                  10. Executive Compensation
              
              
              62Item
                  11. Security Ownership of Certain Beneficial Owners and Management
                  and
                  Related Stockholder
                Matters
              
              
              62Item
                  12. Certain Relationships and Related Transactions, and Director
                  Independence
              
              
              63Item
                  13. Exhibits
              
              
              63Item
                  14. Principal Accountant Fees and Services
              
              
              64SIGNATURES
              
              
              65


3


FORWARD-LOOKING
      STATEMENTS





Certain
      statements in this Annual Report on Form 10-KSB constitute “forward-looking
      statements” within the meaning of Section 27A of the Securities Act of 1933, as
      amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
      When used in this Report, or in our future filings with the SEC, in our press
      releases and in oral statements made with the approval of an authorized
      executive officer, the words or phrases “anticipates,” “estimates,” “expects,”
“will likely result,” “projects,” “believes,” “intends,” or similar expressions
      are intended to identify such forward-looking statements, but are not the
      exclusive means of identifying such statements. These forward-looking statements
      involve risks and uncertainties that may cause our actual results to differ
      materially from the results discussed in the forward-looking
      statements.





We
      caution you not to place undue reliance on these forward-looking statements,
      which speak only as of the date made. We undertake no obligation to revise
      any
      forward-looking statements in order to reflect events or circumstances after
      the
      date of such statements. Readers are urged to carefully review and consider
      the
      various disclosures made by us in this report and other reports we file with
      the
      SEC that attempt to advise interested parties of the risks and factors that
      may
      affect our business.




**PART
      I**





ITEM
      1.
      DESCRIPTION OF BUSINESS.





*Introduction*





SpectraScience,
      Inc. (“SpectraScience”) was incorporated in the State of Minnesota on May 4,
      1983 as GV Medical, Inc. In October 1992, GV Medical discontinued its prior
      business, refocused its development efforts and changed its name to
      SpectraScience, Inc. The “Company”, hereinafter refers to SpectraScience, Inc.
      and its wholly-owned subsidiary, Luma Imaging Corporation. From 1996 until
      filing for bankruptcy in 2002, the Company focused on developing the
      WavSTAT ® Optical
      Biopsy System (“WavSTAT”). The WavSTAT  is
      a
      proprietary, minimally invasive technology that optically scans tissue in
      real-time to distinguish between normal and pre-cancerous or cancerous tissue,
      without the need to remove tissue from the body.





Our
      principal executive offices are located at 11568 Sorrento Valley Rd., Suite
      11,
      San Diego, CA 92121. You can reach us by telephone at (858) 847-0200; by fax
      at
      (858) 847-0880; or by email at info@spectrascience.com. Our website address
      is
      http://www.spectrascience.com, however the information contained on our web
      site
      is not deemed to be a part of this document.





*Reorganization*





The
      Company adopted “fresh-start reporting” effective August 2, 2004, given the
      absence of any operating activity or other significant activity for almost
      two
      years, in accordance with the guidelines of the A.I.C.P.A.’s Statement of
      Position 90-7, “Financial Reporting by Entities in Reorganization Under the
      Bankruptcy Code” (“SOP 90-7”).





The
      Company received funding and commenced operations effective August 2, 2004
      and
      as of that date (for purposes of this Report, the “Effective Date”) the Company
      became the “Successor Company.” The Company as it existed prior to August 2,
      2004, is referred to as the “Predecessor Company.”




4




*Acquisition
      of Luma Imaging Corporation Assets*





On
      November 6, 2007, the Company acquired 100% of the shares of Luma Imaging
      Corporation (“LUMA â ”)
      from
      its shareholders in consideration for 11.2 million restricted shares of
      SpectraScience common stock (see Note 1 of the accompanying consolidated
      financial statements).





LUMA
      had
      developed and received approval from the US Food and Drug Administration (the
      “FDA”) for an optical, non-invasive diagnostic imaging system that is proven to
      more effectively detect cervical cancer precursors than using conventional
      means
      alone (i.e. colposcopy). The LUMA Cervical Imaging System utilizes a single-use
      disposable probe and requires little additional training as it leverages
      clinician’s existing skill sets. When used as an adjunct to colposcopy, LUMA
      detects significantly more high-grade cervical cancer precursors than colposcopy
      alone.




The
      transaction was accounted for as an acquisition of assets that included
      intellectual property, inventory and equipment. The intellectual property
      consists of a total of 28 issued US Patents, Notice of Allowance on 2 patent
      applications and 21 additional patent applications.




Products
      and Markets




SpectraScience
      has developed a technology platform to instantly determine if tissue is normal,
      pre-cancer or cancerous, without the need for exploratory biopsy. The Company
      has received its first FDA approval to market its proprietary and patented
      optical biopsy system capable of determining instantaneously whether colon
      tissue is normal, pre-cancerous or cancerous without physically removing tissue
      from the body and without waiting days for a pathology report. The
      Company has also developed an additional application for the detection of
      pre-cancerous and cancerous tissue in the esophagus, as well as recently
      expanded its product offerings to cervical cancer and pre-cancer detection
      through the acquisition of Luma Imaging
      Corporation.





The
      WavSTAT operates by using cool, safe UV laser light to optically scan and
      analyze tissue, enabling the physician to make an instant diagnosis during
      endoscopy when screening for cancer and, if warranted, to begin immediate
      treatment during the same procedure. The SpectraScience WavSTA T uses
      laser-induced auto-fluorescence to obtain spectral information from tissue
      at
      the suspected site. The system is a non-significant risk device which transmits
      low-level UV laser light energy through an optical fiber to the tissue via
      the
      working channel of an endoscope. The tissue in contact with the optical fiber
      absorbs the light. The resulting tissue auto-fluorescence is collected by the
      same optical fiber and returned to an optical detector within the WavSTAT
      console for measurement. The system analyzes the spectral data and displays
      the
      results graphically for the user as normal tissue (green light), suspected
      pre-cancer, or cancer (red light). Data are recorded on a printer and saved
      in
      flash memory and a hard drive. The WavSTAT has been tested at five leading
      medical centers, including the Mayo Clinic and Massachusetts General Hospital,
      with results demonstrating statistically significant improvement in physician
      accuracy in the ability to detect pre-cancerous and cancerous tissue during
      endoscopy.





The
      WavSTAT was specifically designed to serve as a technology platform to
      facilitate multiple medical applications for cancer detection. Spectra Science
      sees additional opportunities for this core technology in several other large
      as-yet-unexplored markets which include lung, skin, oral, prostate, breast,
      urinary and bladder cancer detection. The Company is currently developing
      additional applications of its platform for these markets, and is analyzing
      feasibility of the use of our technology and the revenue opportunity for each
      market.




5




*Colorectal
      Cancer*





The
      American Cancer Society reports colorectal cancer as the third most common
      cancer diagnosed in the US with approximately 148,610 new cases annually. With
      an estimated 55,170 deaths in 2006, colorectal cancer is second only to lung
      cancer as the leading cause of cancer death in the US. Colorectal cancer affects
      men and women equally and more women over the age of 75 will die from colorectal
      cancer than from breast cancer. Candidates for colorectal cancer screening
      include all persons, with or without symptoms, over the age of 50 (or an
      estimated 80-90 million people in the US) with the screening market expected
      to
      increase 20% over the next ten years. Demographic statistics for the European
      Union are very similar.





Colorectal
      cancer is primarily diagnosed through the discovery and histo-pathologic
      analysis of polyps. Colon polyps are small masses of tissue found in the lining
      of the colon that may be either benign or malignant. The most commonly performed
      and generally accepted colorectal cancer screening procedure to detect polyps
      is
      an endoscopy of the lower colon also known as a flexible sigmoidoscopy or,
      alternately, a full colonoscopy. According to the American Society for
      Gastrointestinal Endoscopy guidelines for colorectal cancer screening, large
      polyps (greater than 1 centimeter) are generally removed as a matter of course
      and sent to pathology for evaluation. On the other hand, the guidelines further
      state that small polyps (less than 1 centimeter which account for approximately
      85% of all polyps) require, "individualized treatment on a case by case basis".
      The clinical utility of the WavSTAT occurs when the physician must decide the
      best course of treatment for small polyps. When small polyps are found, it
      is
      left to the physician's discretion based primarily on visual assessment, whether
      to remove the polyp, place the patient under surveillance, or to biopsy. If
      a
      biopsy is performed and cancer or pre-cancer is documented by pathology, the
      polyp must then be removed during a second costly endoscopy procedure.





Relative
      to colorectal cancer, five-year survival rates as reported by the American
      Cancer Society are as follows:





·
            Approximately
                92% of patients live five years or longer if the cancer is detected
                and
                treated at an early stage;




·
            Only
                35% of patients live five years or longer if the cancer spreads outside
                the polyp and colon to nearby organs or lymph nodes;
                and




·
            The
                five-year survival rate for those patients in whom the cancer has
                spread
                further to the liver or other organs is only
                7%.




Clearly,
      early detection of colorectal cancer is essential to long-term survival.
      Unfortunately, the American Cancer Society reports that only 37% of colorectal
      cancers are detected at an early stage. Clinical studies indicate that
      colorectal cancer screening procedures result in earlier detection and can
      prevent as many as 20 to 40% of potential colorectal cancers and subsequently
      reduce colorectal cancer deaths by 30 to 50%. Colorectal screening procedures
      not only save lives, they also save money. If a patient is not diagnosed until
      symptoms develop and the disease has spread, or if misdiagnosed at an early
      stage, the chance of patient survival plummets and more advanced treatment
      regimens such as surgery, chemotherapy and/or radiation become
      necessary.




6




The
      WavSTAT was specifically designed to be used during screening endoscopy of
      the
      colon to aid and improve the physician's ability to identify small polyps as
      normal, pre-cancerous or cancerous tissue in real time. Results from the
      Company's FDA regulated clinical studies performed at the Mayo Clinic
      (Rochester, MN), Massachusetts General Hospital (Boston, MA), Hennepin County
      Medical Center (Minneapolis, MN) and Minnesota Gastroenterology P.A. (St. Paul
      and Minneapolis, MN) demonstrated that using the WavSTAT during colorectal
      endoscopic screening increased the physician's diagnostic accuracy in detecting
      pre-cancerous or cancerous polyps by a statistically significant
      amount.





Based
      on
      the results demonstrated by these clinical studies, management believes that
      using the WavSTAT will:





·
            Significantly
                improve the physician's diagnostic accuracy in determining whether
                small
                polyps in the colon are pre-cancerous or
                cancerous;




·
            Improve
                patient survival rates by earlier detection and treatment of cancers,
                and
                more importantly pre-cancers, by more accurately identifying cancers
                or
                pre-cancers the physician may
                misdiagnose;




·
            Improve
                the patient's quality of life by providing an immediate analysis
                of the
                tissue, thereby eliminating the anxiety of waiting several days to
                hear
                the pathology results;




·
            Enable
                the physician to diagnose and treat the patient during the same endoscopy
                procedure with the same biopsy instrument, thereby potentially reducing
                the need for scheduling a second expensive endoscopy for treatment
                purposes;




·
            Be
                cost effective by significantly reducing the number of physical biopsies
                performed and by reducing the number of unnecessary follow-on endoscopies
                performed; and




·
            Be
                cost effective by reducing the number of misdiagnosed patients, thereby
                eliminating the need for more costly advanced treatments such as
                surgery,
                chemotherapy and/or radiation.




*Esophageal
      Cancer*





Barrett’s
      esophagus is a condition of the lining of the lower esophagus thought to be
      caused primarily by Gastro Esophageal Reflux Disease (“GERD”), more commonly
      known as chronic heartburn. Barrett’s esophagus is considered to be a
      pre-malignant stage and a precursor to esophageal cancer. Physicians typically
      recommend that persons with chronic heartburn should have an endoscopy to look
      for Barrett’s esophagus. Some Barrett’s patients will advance further to a stage
      where additional abnormal tissue called dysplasia is present. Dysplasia is
      known
      to be the next progressive step toward esophageal cancer and is categorized
      as
      either low-grade or high-grade.




7




Barrett’s
      esophagus, dysplasia and esophageal cancer patients are presently diagnosed
      via
      endoscopy of the esophagus with the physician taking multiple random physical
      biopsies of the esophageal lining, a significantly invasive procedure.
      High-grade dysplasia is a critical stage to correctly diagnose because
      physicians frequently recommend surgical resection or removal of the esophagus
      in such an event. Unfortunately for the patient, dysplasia is difficult to
      find
      and/or diagnose because it is not reliably visible to the physician during
      standard endoscopy. Accurate diagnosis is critical and, as a result, physical
      biopsies (as many as 20 at once) are performed either randomly or in a geometric
      pattern throughout the length of the esophagus in the hope **** of
      finding the most appropriate tissue to physically biopsy. Current medical
      practice typically follows the guidelines described below:





·
            Patients
                with chronic GERD (severe heartburn) receive a screening endoscopy
                of the
                esophagus with multiple biopsies to check for Barrett's
                esophagus;




·
            Patients
                with Barrett's esophagus receive an endoscopy with multiple biopsies
                every
                year to check for dysplasia;




·
            Patients
                with Barrett's esophagus that has progressed to include low grade
                dysplasia receive an endoscopy with multiple biopsies every 6 months
                to
                check for high grade dysplasia; and




·
            Patients
                with Barrett's esophagus that has progressed to include high grade
                dysplasia receive an endoscopy with multiple biopsies every 3 months
                to
                check for cancer and/or may be referred for esophageal surgical resection,
                photodynamic therapy or electrical
                ablation.





The
      American Cancer Society estimated that 14,550 new cases of esophageal cancer
      were diagnosed in the year 2006, with a greater than 90% mortality rate. In
      addition, the rate of esophageal cancer is growing five times faster than any
      other form of cancer. The relatively high death rate associated with esophageal
      cancer typically results from a lack of early diagnosis with the outcome being
      that the cancer has grown to an advanced stage. As described below, the
      frequency of endoscopic surveillance for these patients increases as the
      pre-cancerous stages advance in hopes of providing the earliest possible
      diagnosis.





The
      Company has developed an application for the WavSTAT for the detection of
      pre-cancerous and cancerous tissue in the esophagus. *Spectra* Science
      completed a clinical study in April 2002 using its WavSTAT for the detection
      of
      pre-cancerous and cancerous tissue in the esophagus. This clinical trial was
      designed to determine the viability of using spectroscopic techniques to detect
      esophageal cancer in Barrett's patients, and to develop and demonstrate the
      feasibility of the WavSTAT for this type of application. A total of 87 patients
      with Barrett's esophagus were enrolled into the trial with 326 optical and
      physical biopsies taken. The results of the evaluation show that we were able
      to
      obtain a sensitivity of 95% and a specificity of 80% in determining high-grade
      versus low-grade dysplasia or non-dysplastic Barrett's esophagus, suggesting
      that the WavSTAT
      is effective in detecting pre-cancerous and cancerous tissue .
      Derived
      from the study data, a proprietary tissue recognition software algorithm was
      developed and is being used in a current trial.





The
      annual potential revenue estimated for esophageal cancer and pre-cancer
      detection in the US and EU is $850 million and the disposable/re-useable market
      is estimated at an additional $250-650 Million.





*Cervical
      Cancer*





Cervical
      cancer is the sixth most common form of malignancy in U.S. women, with
      approximately 10,000 new cases per year. An additional 600,000 women are
      identified each year as having pre-cancerous cervical disease. Early detection
      of these pre-cancerous conditions allows clinicians to treat patients more
      effectively, less expensively, and with fewer lasting health effects. Currently,
      women with abnormal Pap tests are diagnosed with a colposcope, a decades-old,
      low-powered binocular microscope technology, which provides only a limited
      visual assessment of the cervix. In fact, a recent large-scale National Cancer
      Institute-sponsored clinical trial demonstrated that colposcopy failed to detect
      33% of high-grade precancerous lesions in women referred with questionable
      Pap
      results. LUMA’s ability to detect close to 30% more ASCUS/LSIL cervical cancer
      precursors than colposcope alone provides clinicians with a valuable tool in
      the
      fight against cervical cancer in addition to colposcopy alone.




8




More
      than
      four million U.S. women have abnormal Pap tests each year, and they typically
      undergo a series of repeat, stressful and expensive diagnostic tests. For women
      with precancerous lesions, the long diagnostic cycle can allow the disease
      to
      progress and develop into invasive, life-threatening cancers. By providing
      a
      more definitive test, it is expected that LUMA will allow clinicians to more
      effectively manage and treat millions of women who are at risk of cervical
      cancer.





The
      LUMA
      provides a, non-invasive diagnostic imaging system to detect cervical cancer
      precursors more effectively than using conventional means alone (i.e.
      colposcopy). The LUMA utilizes a single-use disposable probe and requires little
      additional training as it leverages clinicians’ existing skill sets. When used
      as an adjunct to colposcopy, LUMA detects significantly more high-grade cervical
      cancer precursors than colposcopy alone. Clinical trials comprised of over
      3,000  women
      have demonstrated LUMA’s ability to detect close to 30% more Atypical Squamous
      Cell of Undetermined Significance/Low-grade Squamous Intraepithelial Lesion
      (ASCUS/LSIL) cancer cell precursors than colposcopy alone. LUMA received FDA
      approval as an adjunct to colposcopy in March 2006 and the predecessor company
      was conducting a 950 patient post-approval study (300 were completed) to further
      examine its advanced detection capabilities when placed in a practical clinical
      setting.




In
      the
      U.S. alone, over $6 billion is spent annually on the screening, diagnosis and
      treatment of women with cervical cancer and the colposcopy market alone is
      approximately $1.0 billion annually. Diagnosing cervical cancer is often a
      long
      and uncertain process, requiring repeat visits by anxious patients.
      Approximately two million colposcopy procedures are performed annually in the
      United States, with many repeat exams aimed at arriving at a definitive
      diagnosis. The introduction of HPV-DNA testing is expected to be a catalyst
      for
      this market, increasing the number of colposcopy procedures performed each
      year.
      LUMA offers a reliable, easy-to-use diagnostic exam that provides rapid answers
      for clinicians and their patients by greatly reducing missed diagnosis and
      allowing for early-stage decision and treatment of cervical cancer
      precursors.





Government
      Regulation





*United
      States*





Extensive
      government regulation, both in the United States and internationally, controls
      the design, manufacture, labeling, distribution and marketing of our products,
      particularly regarding product safety and effectiveness. In the United States,
      medical devices are subject to review and clearance or approval by the Food
      and
      Drug Administration (FDA). The FDA regulates the clinical testing, manufacture,
      labeling, distribution and promotion of medical devices. If we fail to comply
      with applicable requirements we could face:




·
              fines,
                  injunctions or civil
                  penalties




·
            recall
                or seizure of our products


·
              criminal
                  prosecution


·
              a
                  recommendation that we not be allowed to contract with the
                  government
  ·
              total
                  or partial suspension of
                  production


·
              inability
                  to obtain pre-market clearance/approval for our
                  devices


·
              withdrawal
                  of marketing approvals




9




The
      Food,
      Drug, and Cosmetic Act, the Public Health Service Act, and Safe Medical Devices
      Act of 1990 and other federal statutes and regulations also govern or influence
      the testing, manufacture, safety, labeling, storage, recordkeeping, clearance,
      advertising and promotion of such products.





In
      the
      United States, medical devices are assigned to one of three classes depending
      on
      the controls the FDA deems necessary to ensure the safety and effectiveness
      of
      the device. The WavSTAT and LUMAare both Class III devices; this is FDA’s most
      highly regulated category in the Center for Devices and Radiological Health
      (CDRH). In addition to adhering to general controls to which all medical devices
      are subject, and special controls such as performance standards, post-market
      surveillance and patient registries, a Class III device must receive
      pre-marketing approval to ensure its safety and effectiveness prior to
      commercialization. Some devices, such as those for blood screening, are
      regulated by FDA’s Center for Biologics Research and Review (CBER) under an
      alternate process called a Biologics License Application.





FDA
      approval to distribute CDRH regulated devices can be obtained in one of two
      ways. If a new or significantly modified device is “substantially equivalent” to
      an existing legally marketed device, the new device can be commercially
      introduced after filing a 510(k) pre-market notification with the FDA and the
      subsequent issuance by the FDA of an order permitting commercial distribution.
      Changes to existing devices that do not significantly affect safety or
      effectiveness may be made without an additional 510(k) notification. We received
      510(k) clearance from the FDA for our disposable and reusable Optical Biopsy
      Forceps in December 1996.





A
      second,
      more comprehensive approval process applies to a Class III device that is not
      substantially equivalent to an existing product. First, the applicant must
      usually conduct clinical trials in compliance with testing protocols and patient
      “informed consent” forms approved by the Institutional Review Board (IRB or
      Safety Committee) at each participating research institution. These boards
      oversee and approve all clinical studies at their institutions (in some cases
      a
      central IRB may approve studies at multiple locations). Second, a Pre-Market
      Approval (PMA) application must be submitted to the FDA describing (i) the
      clinical trial results, (ii) the device and its components, (iii) the methods,
      facilities and controls used for manufacture of the device, (iv) proposed
      labeling and advertising literature, and (v) the demonstration that the product
      is safe and effective.





If
      the
      FDA determines, upon receipt of the PMA application, that the application is
      sufficiently complete to permit a substantive review, they will accept the
      application for filing. Review of a pre-market approval application typically
      takes from six months to two years from the date the application is accepted
      for
      filing, but can be significantly longer. Often, during the review period, a
      panel primarily composed of clinicians and acting as an advisory committee,
      will
      be convened to review, evaluate, and provide non-binding recommendations to
      the
      FDA as to whether the device should be approved. Toward the end of the
      application review process, the FDA generally will conduct an inspection of
      the
      manufacturer’s facilities to ensure that the facilities are compliant with the
      applicable Quality System Regulations requirements.





If
      FDA
      evaluations of both the PMA application and the manufacturing facilities are
      favorable, the FDA will issue either an approval letter or a conditional
      approval letter which contains a number of conditions that must be satisfied
      in
      order to secure final approval of the PMA application. When and if those
      conditions are fulfilled to the satisfaction of the FDA, they will issue an
      approval letter, authorizing commercial marketing of the device for certain
      indications for use. If the FDA’s evaluation of the PMA application or
      manufacturing facilities is not favorable, the FDA will deny approval of the
      application or issue a “not approvable letter.” The FDA may also determine that
      additional clinical trials are necessary, in which case pre-market approval
      could be delayed for several years while additional clinical trials are
      conducted and submitted in an amendment to the PMA application. The pre-market
      approval process can be expensive, uncertain and lengthy, and a number of
      devices for which FDA approval has been sought have never been approved for
      marketing.




10




Any
      products manufactured or distributed pursuant to FDA clearances or approvals,
      are subject to pervasive and continuing regulation by the FDA, including
      record-keeping requirements and reporting of adverse experiences when using
      the
      product





Device
      manufacturers are required to register their establishments and list their
      devices with the FDA and certain state agencies, and are subject to periodic
      inspections by the FDA and certain state agencies. The Food Drug and Cosmetic
      Act requires devices to be manufactured in accordance with Quality System
      Requirements regulations, which impose procedural and documentation requirements
      upon a manufacturer and any of its contract manufacturers with respect to
      manufacturing and quality assurance activities. The frequency and depth of
      inspections of PMA products are generally more detailed and frequent than
      products cleared in the 510(k) process. Quality System Requirements regulations
      also require design controls and maintenance of service records. Changes in
      existing requirements or adoption or new requirements or policies could
      adversely affect our ability to comply with regulatory requirements. Failure
      to
      comply with regulatory requirements could have a material adverse effect on
      our
      business, financial condition or results of operations.





The
      Company submitted a pre-market approval application for market clearance of
      the
      WavSTAT Optical Biopsy System for use during endoscopic screening of the colon
      in September 1998, and was approved by the FDA in November 2000. Based upon
      beta
      site outcome clinical studies, features were added to the WavSTAT, and submitted
      as a supplement to the original filing in September 2001. The supplement for
      the
      WavSTAT II was approved by the FDA in November 2001. The Company submitted
      a
      supplement for approval of WavSTAT III in February 2002 and approval was
      received in August 2002. We anticipate that product improvements requiring
      approval, or any new applications, such as for Barrett’s esophagus developed for
      the WavSTAT  will
      be
      submitted as supplements to the original filing rather than as original PMA
      filings.





A
      similar
      path was followed for the LUMA Cervical Imaging System with the original PMA
      being filed by FDA on June 28, 2004. Following interactive communication with
      FDA and 15 PMA amendments, the product received its PMA approval on March 16,
      2006. In addition to the standard conditions of approval, an additional LUMA
      approval condition was a post-approval study. When the LUMA assets were
      acquired, approximately one third of the study had been completed. We are now
      assessing the data from that study and preparing a plan to continue the
      post-approval study to meet this condition of approval.





We
      are
      also subject to numerous federal, state and local laws relating to such matters
      as safe working conditions, manufacturing practices, environmental protection,
      fire hazard control and disposal of hazardous or potentially hazardous
      substances. We will be subject to additional federal, state and local
      environmental laws when additional commercial development and production of
      the
      WavSTAT and LUMA begin. We are not aware of any manufacturing methods for the
      Systems that will require extensive or costly compliance with environmental
      regulations. However, since laws change over time there can be no assurance
      that
      (i) we will not be required to incur significant costs to comply with all
      applicable laws and regulations in the future, or (ii) the impact of changes
      in
      those laws or regulations or adoption of new laws and regulations will not
      have
      a material adverse effect upon our ability to do business.




11




*European
      Union and Other Countries*





The
      European Union encompasses most of the major countries in Europe. The European
      Union has adopted numerous directives and standards regulating the design,
      manufacture, clinical trial, labeling, and adverse event reporting for medical
      devices. The principal directive prescribing the laws and regulations pertaining
      to medical devices in the European Union is the Medical Devices Directive,
      93/42/EEC.





Devices
      that comply with the requirements of the Medical Devices Directive will be
      entitled to bear the CE mark, indicating that the device complies with the
      essential requirements of the applicable directive. In order to distribute
      a
      medical device in the European Union, the product must earn and display the
      CE
      mark. Generally, companies must also go through the ISO certification process
      in
      order to obtain the CE mark. SpectraScience received ISO 9001 certification
      in
      July 2000, and CE mark authorization for our products in October 2000. In order
      to maintain ISO 9001 certification SpectraScience must undergo a yearly audit
      to
      assure the European Union regulatory agencies of our compliance with ISO 9001
      standards. Our last audit was in 2007, when we earned certification for an
      additional standard, EN 13485:2003, which is a medical device adaptation of
      the
      ISO 9001 standard. We are periodically re-audited to remain ISO 9001 and EN
      13485 certified. There can be no assurance that we will be able to maintain
      international certification or CE mark authorization for any of our products
      or
      product components. Furthermore, even though a device bears the CE Mark,
      practical complications may arise with respect to market introduction because
      of
      differences among countries in areas such as labeling requirements and
      reimbursement practices. We may be required to spend significant amounts of
      capital in order to comply with the various regulatory requirements of foreign
      countries and achieve reasonable payment for our products.





*Product
      Research and Development*





The
      Company invested significant capital in research and development for the fiscal
      year ended December 31, 2007 as compared to prior recent history. The increase
      was as a result of increased clinical trial activity and development of the
      Barrett's software algorithm. Research and development expenses were $796,944
      and $406,300 for the fiscal years ended December 31, 2007 and 2006,
      respectively.





*Compliance
      with Environmental Laws*





Management
      has reviewed the cost of compliance with environmental laws and deemed the
      cost
      of such appliance to be non-material for the fiscal year ended December 31,
      2007
      and the foreseeable future.





*Distribution,
      Sales and Customers*





Our
      objective is to become a leader in the development and commercialization of
      advanced proprietary diagnostic products with the capability to differentiate
      in
      real-time between healthy, and pre-cancerous or cancerous tissue. During 2008,
      our sales and marketing efforts will be focused on selling the WavSTAT and
      LUMA
      Systems in the colorectal, cervical and esophageal cancer diagnostic
      markets.





Successful
      product introduction will require a sales force or a strategic corporate partner
      that has strongly established call patterns within Managed Care Organizations.
      Management believes the availability of clinical support specialists to support
      the sales force, and to conduct training seminars to educate endoscopists and
      other health care providers regarding proper use of the WavSTAT and LUMA
      Systems, will be a strong component of a product introduction strategy. To
      further these objectives during 2007, the Company hired a Director of Marketing
      and Sales, a Director of International Sales, a Manager of Clinical Programs,
      retained a medical consultant and appointed a European Distributor.




12




SpectraScience
      may seek a strategic partner or alliance to further develop and implement
      product introduction, marketing and sales capabilities. Management would focus
      on partners with large sales forces and established call patterns within Managed
      Care organizations. Management believes that use of distributors in its
      international target markets is appropriate. The distributors should have
      significant resources and strong franchises which, when coupled with our
      technology, will increase the likelihood of commercial success in those markets.





*Third-Party
      Reimbursement*





We
      expect
      to market and sell the WavSTAT and LUMA Systems primarily through hospitals
      and
      clinics. In the United States, the purchasers of medical devices generally
      rely
      on Medicare, Medicaid, private health insurance plans, health maintenance
      organizations and other sources of third party reimbursement for health care
      costs, to reimburse all or part of the cost of medical devices and/or the
      procedure in which the medical device is used. Sales of the our
      Systems  will,
      in
      part, be dependent on the availability of adequate reimbursement from these
      third party payers for procedures carried out using our products. We believe
      that less invasive procedures generally provide less costly overall therapies
      compared to conventional drugs, surgery and other treatments. We anticipate
      hospital administrators and physicians will justify the use of our products
      by
      the cost and timesaving recognized and clinical benefits that we believe will
      be
      derived from the use of our products.





Third
      party payers determine whether to provide coverage for a particular procedure
      and reimburse health care providers for medical treatment at a fixed rate based
      on the diagnosis-related group established by the Center for Medicare and
      Medicaid Services (“CMS”). The fixed rate of reimbursement is based on the
      procedure performed and is unrelated to the specific type or number of devices
      used in a procedure. If a procedure is not covered by a diagnosis-related group,
      payers may deny reimbursement. If reimbursement for a particular procedure
      is
      approved, third party payers will reimburse health care providers for medical
      treatment based on a variety of methods, including a lump sum prospective
      payment system based on a diagnosis-related group or per diem, a blend between
      the health care provider’s reported costs and a fee schedule, a payment for all
      or a portion of charges deemed reasonable and customary, or a negotiated per
      capita fixed payment.





Upon
      product introduction, currently existing available codes can be used to provide
      a level of reimbursement to users. Management believes however, that currently
      available reimbursement codes do not adequately reimburse for the anticipated
      value that optical biopsy technology brings to the medical care system. Optical
      biopsies are not currently approved for reimbursement by third-party payers,
      and
      there can be no assurance that optical biopsy technology will be approved for
      any third party reimbursement, even if it proves to play a significant role
      in
      improving the endoscopist’s ability to accurately differentiate among polyps in
      the colon or Barrett’s esophagus, thereby leading to early detection and
      subsequent treatment.





Medical
      equipment capital costs incurred by hospitals are reimbursed separately from
      diagnosis-related group payments. Changes in federal legislation, or policies
      of
      the government or third-party payers that reduce reimbursements under capital
      cost pass through-systems, could adversely affect the market for our
      products.




13




As
      stated
      previously, demonstrating cost-effectiveness and improved patient outcomes
      is
      critical to the sales cycle since payers evaluate these factors in determining
      whether to reimburse for new technologies. Payers may also delay reimbursement
      decisions for a year or more, even when provided with cost-effectiveness data,
      while they conduct their own technology assessments. The availability of
      peer-reviewed literature regarding the technology may help payers in reducing
      this technology assessment timeline. To promote the dissemination of literature
      regarding the WavSTAT, LUMA and optical biopsy technology, SpectraScience
      intends to have published clinical utility data in peer-reviewed
      journals.





We
      expect
      that there will be continued pressure on cost-containment throughout the United
      States health care system. Cost reduction, cost containment, managed care,
      and
      capitation pricing (putting a ceiling on the price) are very familiar themes
      within healthcare. Limits on third-party reimbursements that lead to cuts in
      reimbursements for new or experimental procedures would affect the ability
      of
      smaller companies with new technologies, to compete with larger established
      firms, or with established technologies. Lobbying activities are often necessary
      to bring to light the value of these new technologies but require extensive
      amounts of corporate resources that the Company may not be able to
      afford.





Reimbursement
      systems in international markets vary significantly by country and by region
      within some countries, and reimbursement approvals must be obtained on a
      country-by-country basis. Many international markets have government managed
      health care systems that control reimbursement for new products and procedures.
      In most markets, there are private insurance systems as well as government
      managed systems. Market acceptance of the SpectraScience products will depend
      on
      the availability and level of reimbursement in international markets we target.
      There can be no assurance that we will obtain reimbursement in any country
      within a particular time, for a particular time, for a particular amount, or
      at
      all.





We
      are
      unable to predict what additional legislation or regulation relating to the
      health care industry or third-party coverage and reimbursement may be enacted
      in
      the future, if any, or what effect it might have on us. Reforms may include
      (i)
      mandated basic health care benefits, (ii) controls on health care spending
      through limitations on the growth of private health insurance premiums and
      Medicare and Medicaid spending, (iii) greater reliance on prospective payment
      systems, (iv) the creation of large insurance purchasing groups, and (v)
      fundamental changes to the health care delivery system. Management anticipates
      that Congress and state legislatures will continue to review and assess
      alternative health care delivery systems and payment mechanisms. Due to
      uncertainties regarding the ultimate features of reform initiatives and their
      enactment and implementation, we cannot predict which reform proposals, if
      any,
      will be adopted, when they may be adopted or what impact they may have on
      SpectraScience. Failure by hospitals and other users of our products to obtain
      reimbursement from third-party payers, or changes in government and private
      third-party payers’ policies toward reimbursement for procedures employing our
      products, could have a material adverse effect on our business, financial
      condition and results of operations.




*Manufacturing
      and Sources of Supply*





SpectraScience
      has begun to manufacture the WavSTAT and plans to begin the manufacture of
      the
      LUMA at its facility in San Diego. The WavSTAT forceps and LUMA disposable
      covers are outsourced with a United States contract OEM manufacturer. At the
      present time SpectraScience performs the manufacturing of the optical fiber
      portion of the forceps in-house. The Company also performs certain final
      assembly processes of the WavSTAT Forceps. All WavSTAT and LUMA Systems
      previously used for pre-clinical testing, FDA compliant clinical trials, and
      cost effectiveness/outcome clinical studies were manufactured under a Quality
      System with Standard Operating Procedure controls. Management continues to
      utilize these quality control Systems and adds to or modifies them as
      necessary.




14




The
      WavSTAT and LUMA Systems are, and will be, manufactured in accordance with
      current FDA Quality System Regulations (“QSR”) and ISO 9001 International
      Standards, both of which are necessary to sell products within the United States
      and the European Union. These requirements impose certain procedural and
      documentation requirements upon SpectraScience with respect to manufacturing
      and
      quality assurance activities, as well as upon those third parties with whom
      the
      Company contracts to perform certain manufacturing processes.





During
      the third quarter of 2007, SpectraScience was granted ISO 9001 and 13485:2003
      certification for its manufacturing facility and Quality System. These
      international standards are the European equivalent to the FDA’s Quality System
      Regulations. Meeting these standards permits use of the “CE mark” to export the
      WavSTAT optical biopsy system to the European Union and most other countries
      of
      the world.





The
      manufacturing processes and Standard Operating Procedures required to build
      a
      WavSTAT System have been reviewed by the FDA and we are authorized to
      manufacture the product in our current facility. Both the FDA and the European
      Notified Body will continue to perform periodic audits as long as SpectraScience
      manufactures and commercializes medical products





*Competition*





The
      medical device industry is highly competitive. Management believes the Company
      has few direct competitors in applying spectroscopy for the differentiation
      of
      normal, pre-cancerous or cancerous tissues in the gastrointestinal tract;
      however, the development of products using spectroscopic diagnostics for various
      medical specialties is rapidly growing. To the best of our knowledge, no other
      competitors have completed FDA clinical studies or submitted a pre-market
      approval application to the FDA or received CE Mark authority to distribute
      a
      product for the detection of colorectal or esophageal cancer.





The
      companies listed below have developed or are in the process of developing
      products that use light-based spectroscopic technology. They could potentially
      compete with SpectraScience products or technologies. Although none of these
      companies uses a technology or method which is the same as the SpectraScience
      technologies and methods.




15




·
              Mediscience
                  Technology (Cherry Hill, New Jersey-OTC:MDSC.OB) has conducted
                  feasibility
                  clinical studies for oral leukopakia, a pre-cancerous condition
                  of the
                  mouth, with a prototype product called CD SCAN which uses a light-based
                  spectroscopy system. They plan to conduct clinical studies in the
                  areas of
                  cervical cancer with products using spectroscopic
                  technology.




·
              Electro-Optical
                  Sciences, Inc. (Irvington, NY-OTC:MELA) is focused on the design
                  and
                  development of a non-invasive, point-of-care instrument to assist
                  in the
                  early diagnosis of melanoma. MelaFind®, features a hand-held imaging
                  device that emits multiple wavelengths of light to capture images
                  of
                  suspicious pigmented skin lesions and extract data. The data is
                  then
                  analyzed against its proprietary database of melanomas and benign
                  lesions
                  using sophisticated algorithms in order to provide information
                  to the
                  physician and produce a recommendation of whether the lesion should
                  be
                  biopsied. They are currently designing clinical
                  trials.





·
              SpectRx,
                  Inc. (Norcross, GA-OTC SPRX.PK) isa
                  medical technology company focused on developing medical devices
                  that have
                  the potential to improve health care. The technology, including
                  products
                  in research and development, includes: a) biophotonics technology
                  for the
                  non-invasive detection of cancers, including cervical cancer, b)
                  methods
                  of sampling interstitial fluid using laser energy to create micropores
                  for
                  improved glucose and alcohol monitoring and c) methods of delivering
                  insulin to people with diabetes with a SimpleChoice® product line. In
                  2007, they indicated that they sold their insulin delivery business
                  and
                  will focus on completing the development of their cervical cancer
                  detection device.





Many
      of
      these companies have substantially greater resources than we do, either
      internally or in combination with strategic partners. These resources may allow
      them to develop, market and distribute technologies or products that could
      be
      more effective than those developed or marketed by us, or that would render
      our
      technologies and products obsolete. The resource advantages they may have
      are:





·
            greater
                capital resources,


·
            greater
                manufacturing resources,


·
            greater
                resources and expertise in testing products in clinical
                trials,


·
            greater
                resources and expertise in the areas of research and
                development,


·
            greater
                expertise in obtaining regulatory approvals,
                and


·
            greater
                resources for marketing and sales
                activities.





*Patents*





SpectraScience
      currently owns exclusive rights to a total of eight issued US patents and
      international patents for the WavSTAT technology.





**Patent
                Name**
            
            **U.S.
                Patent Number**Optical
                Biopsy Forceps
            
            
            5,762,613System
                for Diagnosing Tissue with Guidewire
            
            
            5,601,087Method
                of Diagnosing Tissue with Guidewire
            
            
            5,439,000Guidewire
                Catheter and Apparatus for Diagnostic Imaging
            
            
            5,383,467Optical
                Biopsy Forceps System and Method of Diagnosing Tissue
            
            
            6,066,102Optical
                Biopsy Forceps
            
            
            6,129,683Optical
                Biopsy System and Methods for tissue Diagnosis
            
            
            6,174,291Optical
                Forceps System and Method of Diagnosing and Treating
                Tissue
            
            
            6,394,964




16




SpectraScience
      is also the exclusive licensee through the Massachusetts General Hospital of
      US
      Patent 5,843,000 entitled, “Optical Biopsy Forceps and Method of Diagnosing
      Tissue” and a pending international patent application. The above patents expire
      between January 2015 and May 2022. Each of the international patents designates
      several countries for patent protection. In October 2006, the Company filed
      for
      a WavSTAT patent entitled “System and Method for Non-Endoscopic Optical Biopsy
      Detection of Diseased Tissue”.





SpectraScience
      currently owns exclusive rights to a total of twenty-eight issued US patents
      and
      international patents for the LUMA technology.





**Patent
                Name**
            
            **U.S.
                Patent Number**Spectral
                Volume Microprobe Analysis of Materials
            
            
            5,713,364Spectral
                Volume Microprobe Arrays
            
            
            6,104,945Sheath
                for Cervical Optical Probe
            
            
            D453,832Sheath
                for Cervical Optical Probe
            
            
            D453,962Sheath
                for Cervical Optical Probe
            
            
            D453,963Sheath
                for Cervical Optical Probe
            
            
            D456,964Spectroscopic
                System Employing a Plurality of Data Types
            
            
            6,385,484Spectral
                Volume Microprobe Arrays
            
            
            6,411,835Systems
                and Methods for Optical Examination of Samples
            
            
            6,411,838Spectral
                Data Classification of Samples
            
            
            6,421,553Optical
                Methods and Systems for Rapid Screening of the Cervix
            
            
            6,427,082Sheath
                for Cervical Optical Probe
            
            
            D460,821Substantially
                Monostatic, Substantially Confocal Optical Systems for Examination
                of
                Samples
            
            
            6,760,613Fluorescent
                Fiberoptic Probe for Tissue Health Discrimination and Method of Use
                Thereof
            
            
            6,768,918Method
                and Apparatus for Identifying Spectral Artifacts
            
            
            6,818,903Spectral
                Volume for Microprobe Arrays
            
            
            6,826,422Sheath
                for Cervical Optical Probe
            
            
            D507,349System
                for Normalizing Spectra
            
            
            6,839,661Optical
                Probe Accessory Device for Use In-Vivo Diagnostic
                Procedures
            
            
            6,847,490Methods
                of Monitoring Effects of Chemical Agents on a Sample
            
            
            6,902,935Sheath
                for Cervical Optical Probe
            
            
            D500,134Optimal
                Windows for Obtaining Optical Data for Characterization of Tissue
                Samples
            
            
            6,933,154Methods
                and Apparatus for Displaying Diagnostic Data
            
            
            7,136,518Heterodyne
                System and Method for Sensing a Target Substance
            
            
            5,022,757Spectral
                Volume Microprobe Analysis of Materials
            
            
            5,813,987Colonic
                Polyp Discrimination by Tissue Florescence and Fiberoptic Probe
            
            
            7,103,401Optical
                Methods and Systems for Rapid Screening of the Cervix
            
            
            7,127,282Methods
                and Systems for Correcting Image Misalignment
            
            
            7,187,810




17




The
      Company has also received Notice of Allowance from the U.S. Patent and Trademark
      Office on two additional applications. An additional 21 patent applications
      are
      also pending. In total, more than 500 valid claims have been granted covering
      a
      broad range of technology and methods. Foreign rights have further been secured
      for many of the most important patents.





SpectraScience
      believes that it holds the single largest patent portfolio of its kind in the
      field of optical methods for identifying tissue abnormalities, particularly
      for
      identifying cancer and its precursors. The Company also believes that its
      portfolio will protect the core technology and methods embodied in the LUMA
      and
      WavSTAT Systems and for many of its foreseeable extensions and will create
      a
      substantial barrier to entry for others pursuing similar
      approaches.





*Core
      Areas of Patent Protection*




More
      specifically, SpectraScience’s portfolio provides protection in the following
      key technology, design and methods areas:




—
            Localized
                tissue characterization using optical
                methods




—
            Specific
                application of fluorescence and broadband spectroscopy, and video
                imaging,
                particularly in combination




—
            Designs
                and use of a disposable sheath, particularly in combination with
                systems
                and methods, including use of unique
                identifiers




—
            Algorithmic
                methods specific to optical assessment of tissue characteristics,
                particularly involving identification, classification and calibration
                methods




—
            Clinical
                applications of these methods and systems for identifying tissue
                characteristics, including use of display methods, marking methods
                (including biomarkers), and in combination with
                treatment




—
            Applications
                to further system development, including applications for screening,
                treatment and other fields beyond cervical
                cancer





SpectraScience
      holds registered trademarks for the WavSTAT and LUMA Cervical Imaging System
      and
      SpectraScience documents, software and graphics are protected by appropriate
      copyrights.




SpectraScience’s
      ability to obtain and maintain patent protection for its products, preserve
      its
      trade secrets and operate without infringing on the proprietary rights of others
      will directly affect the success the Company's operations. The Company's
      strategy regarding the protection of its proprietary intellectual property
      and
      innovations is to seek patents on those portions of our technology that
      management believes are patentable, to obtain copyrights for its software if
      appropriate, and to protect as trade secrets other confidential information
      and
      proprietary know-how. There are certain technological aspects of the WavSTAT
      and
      LUMA Systems that are not covered by any patents or patent applications.
      SpectraScience seeks to protect its trade secrets and proprietary know-how
      by
      obtaining confidentiality and invention assignment agreements in connection
      with
      employment, consulting and advisory relationships.




18




Our
      ability to obtain and maintain patent protection for our products, preserve
      our
      trade secrets and operate without infringing on the proprietary rights of others
      will directly affect how successful our operations will be. Our strategy
      regarding the protection of our proprietary rights and innovations is to seek
      patents on those portions of our technology that we believe are patentable,
      and
      to protect as trade secrets other confidential information and proprietary
      know-how.





The
      patent and trade secret positions of medical device companies like
      SpectraScience are uncertain and involve complex and evolving legal and factual
      questions. To date, no claims have been brought against SpectraScience alleging
      that our technology or products infringe intellectual property rights of others.
      Often, patent and intellectual property disputes in the medical device industry
      are settled through licensing or similar arrangements. However, there can be
      no
      assurance that necessary licenses from other parties would be available to
      us on
      satisfactory terms, if at all. The costs associated with such arrangements
      may
      be substantial and could include ongoing royalties.





United
      States patent applications are secret until patents are issued or corresponding
      foreign applications are published in other countries. Since publication of
      discoveries in the scientific or patent literature often lags behind actual
      discoveries, management cannot be certain that SpectraScience was the first
      to
      invent the inventions covered by each of its pending patent applications, or
      that it was the first to file patent applications for such inventions. In
      addition, the laws of some foreign countries do not provide the same degree
      of
      intellectual property right protection as do the laws of the United States.
      Litigation associated with patent or intellectual property infringement or
      protection can be lengthy and prohibitively costly. There can be no assurance
      that SpectraScience would have the financial resources to defend its patents
      from infringement or claims of invalidity, or to successfully defend itself
      against intellectual property infringement claims by third parties.





*Product
      Liability*





The
      risk
      of product liability claims, product recalls and associated adverse publicity
      is
      inherent in the testing, manufacturing, marketing and sale of medical products.
      We have clinical trial liability insurance coverage at this time for our current
      Barrett’s esophagus study. There can be no assurance that future insurance
      coverage will be adequate or available. We may not be able to secure product
      liability insurance coverage on acceptable terms or at reasonable costs when
      needed. Any liability damages could exceed the amount of our coverage. A
      successful product liability claim against us could require us to pay a
      substantial monetary award. Moreover, a product recall could generate
      substantial negative publicity about our products and business and inhibit
      or
      prevent commercialization of other future products.





*Employees*





As
      of
      March 27, 2008, SpectraScience had thirteen full-time employees, eight involved
      with manufacturing and regulatory affairs, three in sales and marketing and
      two
      engaged in finance and administration. The Company’s payroll is administered
      through an independent third party. SpectraScience is not subject to any
      collective bargaining agreement and management believes that employee relations
      are generally satisfactory.





SpectraScience
      relies on external consultants in the financial, regulatory, software
      development and design engineering areas. When management determines to increase
      our workforce in response to improved economic, market, and/or business
      conditions, there is no assurance that we will be able to attract or retain
      employees with the skills we require.




19




*Executive
      Officers*





Name
            
            Age
            
            PositionJim
                Hitchin
            
            65
            
            Chairman,
                President and Chief Executive OfficerJames
                Dorst
            
            53
            
            VP
                Finance and Chief Financial Officer





The
      following biographical information was provided by the respective
      officers.




**Jim
      Hitchin, Chairman, President and CEO** joined
      SpectraScience in January 2004 as part of the bankruptcy acquisition team.
      For
      the previous 15 years, he was the founder, CEO and Chairman of Infrasonics,
      Inc., a medical device company in the respiratory care field. Infrasonics was
      venture funded and completed a successful initial public offering. Mr. Hitchin
      served as Chairman, President and CEO of Infrasonics during its 15 years as
      a
      public company. Infrasonics was the first in its market to have ISO 9001 and
      the
      CE Mark for fourteen 510(k) and two PMA products. Infrasonics revenue growth
      was
      at a compound rate of 62% during its fifteen-year life before being sold to
      a
      competitor for 2.5 times revenue. In previous companies, he was COO of a public
      energy company and the VP, General Manager of a public oceanographic engineering
      firm. Mr. Hitchin has extensive experience in all phases of manufacturing and
      company operations, in particular, sales and marketing of medical devices.
      He
      graduated from San Diego State University with a degree in Physics.





**Jim
      Dorst, Vice President of Finance and CFO** joined
      the Company in December 2007. Mr. Dorst brings to the Company over 20 years
      of
      senior management experience in finance, operations, planning and business
      transactions. Prior to joining SpectraScience, Mr. Dorst was Chief Financial
      Officer of Aethlon Medical, Inc., a public medical device development company.
      Before joining Aethlon, Mr. Dorst was Vice President of Finance and Operations
      for Verdisoft Corporation, a developmental-stage mobile-software developer
      acquired by Yahoo, Inc. Previously, he held executive positions as SVP of
      Finance and Administration at SeeCommerce, COO/CFO of Omnis Technology Corp
      and
      CFO / SVP of Information Technology at Savoir Technology Group, Inc. (acquired
      by Avnet, Inc.). Mr. Dorst practiced as a Certified Public Accountant with
      Coopers & Lybrand (PricewaterhouseCoopers) and holds an MS in Accounting and
      a BS in Finance from the University of Oregon.




ITEM
      2.
      DESCRIPTION OF PROPERTY.





SpectraScience
      leases its principal facility from an unrelated third party. The facility
      consists of approximately 5,080 square feet of office, research and development,
      manufacturing, quality testing, and warehouse space. The lease provides for
      monthly rental payments of $5,842 through December 2008, plus a pro rata share
      of operating expense and real estate taxes (approximately $1,050 per month).





ITEM
      3.
      LEGAL PROCEEDINGS.





We
      are
      not currently a party to any legal proceedings.





ITEM
      4.
      SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.





None


20




**PART
      II**





ITEM
      5.
      MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.





Market
      Information





Our
      common stock is quoted on the over-the-counter bulletin board under the symbol
      SCIE.OB. The last reported bid price of the common stock on March 27, 2008
      was
      $0.75.





The
      following table sets forth for the calendar period indicated, the quarterly
      high
      and low bid prices of our Common Stock as reported by the OTCBB. The prices
      represent quotations between dealers, without adjustment for retail markup,
      markdown or commission, and do not necessarily represent actual transactions.





BID
                PRICEPERIOD
            
            HIGH
            
            LOW2007:Fourth
                Quarter
            
            $
            1.33
            
            $
            0.84Third
                Quarter
            
            
            1.26
            
            
            0.75Second
                Quarter
            
            
            1.65
            
            
            0.96First
                Quarter
            
            
            1.40
            
            
            0.762006:Fourth
                Quarter
            
            
            2.00
            
            
            1.45Third
                Quarter
            
            
            1.55
            
            
            0.90Second
                Quarter
            
            
            1.55
            
            
            0.62First
                Quarter
            
            
            1.45
            
            
            0.50




On
      March
      27, 2008 we had approximately 750 registered stockholders of record of the
      67,608,372 shares of our common stock. We estimate that there are approximately
      4,000 beneficial stockholders of our common stock.





To
      date,
      we have not declared or paid cash dividends on our common stock. The current
      policy of the Board of Directors is to retain any earnings to fund the
      development and growth of our business. Any future determination to pay cash
      dividends will be at the discretion of our Board of Directors, and will be
      dependent upon our financial condition, results of operations, capital
      requirements and other factors our board may deem relevant at the
      time.





The
      transfer agent and registrar for our common stock is Wells Fargo Shareowner
      Services, located at 161 N. Concord Exchange, South Saint Paul, Minnesota 55075.
      Their telephone number is (800) 468-9716.





Recent
      Sales of Unregistered Securities





*Common
      Stock*





In
      June
      2006, the Company issued 749,325 shares of common stock at a price of $0.67
      per
      share to accredited investors for $502,048 in cash. This transaction was exempt
      from registration pursuant to Regulation D promulgated under the Securities
      Act
      of 1933.




21




From
      March through May of 2007, the Company issued 2,270,000 shares of common stock
      at a price of $0.50 per share to accredited investors for $1,135,000 in cash.
      This transaction was exempt from registration pursuant to Regulation D
      promulgated under the Securities Act of 1933.





In
      November 2007, the Company issued 11,200,000 shares of restricted common stock
      to accredited investors in exchange for the assets of LUMA Imaging Corporation
      (See “ *Acquisition
      of LUMA Imaging Corporation Assets”* described
      in ITEM 1, above). The price paid was based on the value of the underlying
      assets received, which totaled approximately $5,025,000 or $0.45 per share.
      This
      transaction was exempt from registration pursuant to Section 4(2) promulgated
      under the Securities Act of 1933.





In
      December 2007, the Company issued 7,142,857 shares of common stock to accredited
      investors at a price of $0.70 per share. The Company received net cash of
      approximately $4,379,000 after placement agent commissions and expenses of
      $600,000 and other transaction expenses of approximately $21,000. This
      transaction was exempt from registration pursuant to Regulation D promulgated
      under the Securities Act of 1933.





*Preferred
      Stock*





In
      June
      2007, the Company issued 2,000,000 shares of Series A Convertible Preferred
      Stock (“Preferred”) to accredited investors at a price of $0.50 per share for
      $1,000,000 in cash. As of December 31, 2007, the Preferred is convertible into
      common stock. This transaction was exempt from registration pursuant to
      Regulation D promulgated under the Securities Act of 1933.





*Warrants*





In
      June
      2007, the Company issued five-year warrants to accredited investors to purchase
      250,000 shares of Preferred at $0.50 per share.





In
      December 2007, the Company issued 714,285 five-year warrants to purchase common
      stock at $0.80 per share to Advanced Equities, Inc., the Placement Agent
      associated with the December private equity financing.





ITEM
      6.
      MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION





The
      following discussion and analysis provides information that management believes
      is relevant to assess and understand our results of operations and financial
      condition. This discussion should be read in conjunction with the consolidated
      financial statements and footnotes that follow such consolidated financial
      statements.





Certain
      statements contained herein that are not related to historical results,
      including, without limitation, statements regarding the Company's business
      strategy and objectives, future financial position, expectations about pending
      litigation and estimated cost savings, are forward-looking statements within
      the
      meaning of Section 27A of the Securities Act and Section 21E of the Securities
      Exchange Act of 1934, as amended (the "Securities Exchange Act") and involve
      risks and uncertainties. Although we believe that the assumptions on which
      these
      forward-looking statements are based are reasonable, there can be no assurance
      that such assumptions will prove to be accurate and actual results could differ
      materially from those discussed in the forward-looking statements. Factors
      that
      could cause or contribute to such differences include, but are not limited
      to,
      regulatory policies, competition from other similar businesses, and market
      and
      general economic factors. All forward-looking statements contained in this
      Form
      10-KSB are qualified in their entirety by this statement.




22




Plan
      of Operation





The
      Company currently has FDA approval to market the WavSTAT System for detecting
      pre-cancerous and cancerous tissue in the colon and to market the LUMA System
      for use as an adjunct to colposcopy in the detection of early stage cancer
      and
      pre-cancer of the cervix. Our plan is to add another indication for use in
      detecting pre-cancer and cancer in the esophagus. With the acquisition of the
      LUMA product in November 2007, we will be developing a sales plan during the
      first half of 2008. Over the next twelve months SpectraScience intends
      to:





·
            Begin
                selling the WavSTAT System in the US and international markets for
                the
                detection and treatment of colon cancer and
                pre-cancer.





·
            Complete
                WavSTAT System clinical trials related to the diagnosis of esophageal
                cancers.





·
            Begin
                marketing and selling the WavSTAT System in US and international
                markets
                for the detection of esophageal cancer and pre-cancer.





·
            Position
                and begin selling the LUMA System in the US as an adjunct to colposcopy
                to
                specialized OB/GYN clinics (increase revenue), managed care organizations
                (early detection and future cost avoidance), teaching hospitals and
                medical environments where nurse practitioners and/or medical clinicians
                can leverage our technology for effective early
                diagnosis.





·
            Enhance
                our San Diego facility and grow our organization to allow for the
                initial
                manufacture of both WavSTAT and LUMA Systems in-house and also to
                begin
                the design and planning for the next generation of fluorescence-based
                systems.





*Cash
      Requirements*





SpectraScience
      has financed its capital requirements principally through the private sale
      of
      equity securities. The Company had cash and cash equivalents of approximately
      $5,188,000 at December 31, 2007 and $175,000 at December 31, 2006. The increase
      in cash for the fiscal year was a result of the sale of approximately $5,514,000
      in common stock and approximately $973,000 in convertible preferred stock,
      net
      of issuance fees and expenses, offset by expenses incurred in operations,
      principally in personnel costs, clinical trial expenses and professional fees.
      SpectraScience expects that its present cash resources will be sufficient for
      planned operations for the next twelve months.





SpectraScience
      expects to incur significant additional operating losses through 2008, as we
      complete clinical trials, begin outcome-based clinical studies, continue
      research and development activities, and ramp up sales and marketing efforts
      to
      sell both the WavSTAT and LUMA Systems. We may incur unexpected expenses, or
      we
      may not be able to meet our revenue forecast, and such events would require
      us
      to seek additional capital.





23




SpectraScience’s
      future liquidity and capital requirements will depend upon a number of factors,
      including but not limited to:





·
            The
                timing and progress of outcome-based clinical
                trials





·
            The
                timing and extent to which SpectraScience’s products gain market
                acceptance





·
            The
                timing and expense of developing marketing and distribution
                channels





·
            The
                progress and expense of developing next generation products and new
                applications for the WavSTAT and LUMA
                Systems





·
            The
                potential requirements and related costs for product modifications





·
            The
                timing and expense of various U.S. and foreign regulatory
                filings





·
            The
                maintenance of various U.S. and foreign government approvals, or
                the
                timing of receipt of additional approvals,
                and





·
            The
                status, maintenance and enhancement of SpectraScience’s patent
                portfolio.




*Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations*




The
      following discussion should be read in conjunction with the consolidated
      Financial Statements and Notes thereto appearing elsewhere in this
      report.





***Fiscal
      Year Ended December 31, 2007 As Compared To Fiscal Year Ended December 31,
      2006***





*Operating
      Expenses*





Consolidated
      operating expenses were $3,020,588 (of which approximately $1,401,000 was for
      non-cash compensation from stock options) for the fiscal year ended
      December 31, 2007, versus $1,336,875 (of which approximately $468,000 was for
      non-cash compensation from stock options) for the comparable period one
      year ago. The net increase of $1,683,713 was comprised of a $390,644 increase
      in
      research and development expenses, a $703,534 increase in general and
      administrative expenses and a $589,535 increase in sales and marketing
      expenses.





Research
      and development expenses increased by $390,644 primarily due to a $144,541
      increase in stock option compensation expense, an $82,421 increase in clinical
      study expense, a $65,136 increase in design and fabrication expense, a $44,686
      in professional consulting expense and a $53,860 increase in all other research
      and development expenses. All of these increases were a result of the additional
      activity and effort invested in the development of the WavSTAT Systems and,
      later in the fiscal year, the LUMA Systems to prepare both for market
      introduction.




24





General
      and administrative expenses increased $703,534 due to a $534,998 increase in
      stock option compensation expense, a $48,890 increase in professional consulting
      expense, a $34,381 increase in patent amortization expense, a $34,075 increase
      in accounting and audit expense, a $33,315 increase in payroll expense, a
      $10,676 increase in rent expense, a $10,290 increase in travel expense, a
      $35,421 increase in all other expenses offset by a $38,511 decrease in legal
      expenses related to patent activity. The overall increase in most categories
      of
      general and administrative expense reflects the increased activity for fiscal
      2007 over fiscal 2006. The increase in amortization expense is a result of
      the
      acquisition of the LUMA patent portfolio and its subsequent amortization through
      the end of the fiscal year. The decrease in legal patent expense is a result
      of
      higher international patent-related fees in the prior period as a result of
      the
      company securing international patents on its WavSTAT proprietary
      technologies.





Sales
      and
      marketing expenses increased by $589,535 as there were no such expenses in
      fiscal 2006. The total amount was comprised of $256,599 of stock option
      compensation expense, $211,717 of payroll and related expenses, $43,227 in
      consulting expenses, $50,901 in travel expenses and $27,091 in all other sales
      and marketing expenses. These expenses represent the cost of building a sales
      organization during fiscal 2007.





*Other
      Income*





Other
      income, net increased $19,936 due to higher interest earnings on higher average
      cash balances for the year as compared to the prior fiscal year.





Critical
      Accounting Policies and Estimates





This
      discussion and analysis of our financial condition and results of operations
      are
      based upon our consolidated financial statements, which have been prepared
      in
      accordance with accounting principles generally accepted in the United States
      of
      America. The preparation of these consolidated financial statements requires
      us
      to make estimates and judgments that affect the reported amounts of assets,
      liabilities, revenues and expenses and related disclosure of contingent assets
      and liabilities. On an on-going basis, we evaluate these estimates, including
      those related to intangibles, income taxes, financing operations, contingencies
      and litigation. We base our estimates on historical experience and on various
      other assumptions that are believed to be reasonable under the circumstances,
      the results of which form the basis for making judgments about the carrying
      values of assets and liabilities that are not readily apparent from other
      sources. Actual results may differ from these estimates under different
      assumptions or conditions.





We
      have
      identified the policies below as critical to our business operations and the
      understanding of our results of operations. The impact and any associated risks
      related to these policies on our business operations is discussed throughout
      Management's Discussion and Analysis or Plan of Operation where such policies
      affect our reported and expected financial results. Note that our preparation
      of
      this Report on Form 10-KSB requires us to make estimates and assumptions that
      affect the reported amount of assets and liabilities, disclosure of contingent
      assets and liabilities at the date of our consolidated financial statements,
      and
      the reported amount of revenue, if any, and expenses during the reporting
      period. There can be no assurance that actual results will not differ from
      those
      estimates.





*Accounting
      For Transactions Involving Stock Compensation*





In
      December 2004, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standards (“SFAS”) 123(R) (revised 2004),
      "Share-Based Payment", (“SFAS 123(R)”) which amends FASB Statement 123 and was
      effective for public companies for annual periods beginning after December
      15,
      2005. The new standard requires us to expense employee stock options and other
      share-based payments. Since inception on August 2, 2004, the Company has been
      recording to expense the fair value of employee and non-employee options. These
      expenses amounted to $1,401,096 and $467,560 for the years ended December 31,
      2007 and 2006, respectively.




25




*Impairment
      or Disposal of Long-Lived Assets*




SFAS
      No.
      144 “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS
      144”), addresses financial accounting and reporting for the impairment or
      disposal of long-lived assets (such as our patents). SFAS 144 requires that
      long-lived assets be reviewed for impairment whenever events or changes in
      circumstances indicate that their carrying amounts may not be recoverable.
      If
      the cost basis of a long-lived asset is greater than the projected future
      undiscounted net cash flows from such asset (excluding interest), an impairment
      loss is recognized. Impairment losses are calculated as the difference between
      the cost basis of an asset and its estimated fair value. SFAS 144 also requires
      companies to separately report discontinued operations and extends that
      reporting requirement to a component of an entity that either has been disposed
      of (by sale, abandonment or in a distribution to owners) or is classified as
      held for sale. Assets to be disposed of are reported at the lower of the
      carrying amount or the estimated fair value less costs to sell. The Company
      adopted SFAS 144 on August 2, 2004. The provisions of this pronouncement
      relating to assets held for sale or other disposal generally are required to
      be
      applied prospectively after the adoption date to newly initiated commitments
      to
      plan to sell or dispose of such asset, as defined, by management. As a result,
      management cannot determine the potential effects that adoption of SFAS 144
      will
      have on the Company's consolidated financial statements with respect to future
      disposal decisions, if any. Management believes no impairment exists at December
      31, 2007.





*Accounting
      for Income Taxes*





In
      July
      2006, the Financial Accounting Standards Board issued Financial Interpretation
      No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes”, which applies
      to all tax positions related to income taxes subject to SFAS 109, “Accounting
      for Income Taxes”. FIN 48 requires a new evaluation process for all tax
      positions taken. If the probability for sustaining said tax position is greater
      than 50%, then the tax position is warranted and recognition should be at the
      highest amount which would be expected to be realized upon ultimate settlement.
      FIN 48 requires expanded disclosure at each annual reporting period unless
      a
      significant change occurs in an interim period. Differences between the amounts
      recognized in the statements of financial position prior to the adoption of
      FIN
      48 and the amounts reported after adoption are to be accounted for as an
      adjustment to the beginning balance of retained earnings. The Company has
      completed its initial evaluation and implementation of the impact of the January
      1, 2007 adoption of FIN 48 and determined that the Company does not have
      uncertain tax positions on its 2003, 2004, 2005 and 2006 tax returns. Based
      on
      evaluation of the 2007 transactions and events, the Company does not have any
      uncertain tax positions that require measurement. Because the Company had a
      full
      valuation allowance on its deferred tax assets as of December 31, 2007 and
      2006,
      and has not recognized any tax benefits since inception.





*Recent
      Accounting Pronouncements*





In
      September 2006, the Financial Accounting Standards Board, or FASB, issued SFAS,
      No. 157, “Fair Value Measurement.” SFAS No. 157 established a framework for
      measuring fair value in accordance with GAAP, clarifies the definition of fair
      value within that framework, and expands disclosures about the use of fair
      value
      measurements. It also responds to investors’ requests for expanded information
      about the extent to which companies measure assets and liabilities at fair
      value, the information used to measure fair value and the effect of fair value
      measurements on earnings. SFAS No. 157 applies whenever other standards require
      (or permit) assets or liabilities to be measured at fair value, and does not
      expand the use of fair value in any new circumstances. SFAS No. 157 is effective
      for financial statements issued for fiscal years beginning after November 15,
      2007. Management is currently assessing the impact, if any, that SFAS No. 157
      may have on the Company.




26




In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option
      for Financial Assets and Financial Liabilities — Including an amendment of FASB
      Statement No. 115” (“SFAS 159”). This statement permits, but does not
      require, entities to measure many financial instruments at fair value. The
      objective is to provide entities with an opportunity to mitigate volatility
      in
      reported earnings caused by measuring related assets and liabilities differently
      without having to apply complex hedge accounting provisions. Entities electing
      this option will apply it when the entity first recognizes an eligible
      instrument and will report unrealized gains and losses on such instruments
      in
      current earnings. This statement (1) applies to all entities, (2) specifies
      certain election dates, (3) can be applied on an instrument-by-instrument
      basis with some exceptions, (4) is irrevocable, and (5) applies only
      to entire instruments. One exception is demand deposit liabilities which are
      explicitly excluded as qualifying for fair value. With respect to SFAS 115,
      available-for-sale and held-to-maturity securities at the effective date are
      eligible for the fair value option at that date. If the fair value option is
      elected for those securities at the effective date, cumulative unrealized gains
      and losses at that date shall be included in the cumulative-effect adjustment
      and thereafter, such securities will be accounted for as trading securities.
      SFAS 159 will be effective for the Company on January 1, 2008. The Company
      is currently reviewing the fair value option that is permitted, but not
      required, under SFAS 159.





In
      December 2007, the FASB issued No. 141(R), “Business Combinations” (“SFAS
      141(R)”). SFAS 141(R) replaces SFAS 141 and provides greater consistency in the
      accounting and financial reporting of business combinations. SFAS 141(R)
      requires the acquiring entity in a business combination to recognize all assets
      acquired and liabilities assumed in the transaction and any non-controlling
      interest in the acquiree at the acquisition date and be measured at the fair
      value as of that date. This includes the measurement of the acquirer’s shares
      issued in consideration for a business combination, the recognition of
      contingent consideration, the accounting for pre-acquisition gain and loss
      contingencies, the recognition of capitalized in-process research and
      development, the accounting for acquisition related restructuring cost accruals,
      the treatment of acquisition related transaction costs and the recognition
      of
      changes in the acquirer’s income tax valuation allowance and deferred taxes.
      SFAS 141(R) will be effective for the Company on January 1, 2009 and is to
      be applied prospectively. Early adoption is not permitted. Management is
      currently assessing the impact, if any, that SFAS 141(R) may have on the
      Company.





In
      November 2007, the Emerging Issues Task Force (EITF) ratified a consensus on
      EITF Issue No. 07-1, “Accounting for Collaborative Arrangements” (“EITF
      07-1”) which requires participants in a collaboration to make separate
      disclosures regarding the nature and purpose of an arrangement, their rights
      and
      obligations under the arrangement, the accounting policy for the arrangement
      and
      the income statement classification and amounts arising from the arrangement
      between participants for each period an income statement is presented. EITF
      07-1
      is effective for us beginning in the first quarter of fiscal year 2009. We
      are
      currently evaluating the impact of the provisions of EITF 07-1 on our financial
      position, results of operations and cash flows and therefore, the impact of
      the
      adoption is unknown at this time.




27




In
      June
      2007, the EITF ratified a consensus on EITF Issue No. 07-3 (“EITF 07-3”),
“Accounting for Non-Refundable Advance Payments for Goods or Services to Be
      Used
      in Future Research and Development Activities,” which concluded that
      non-refundable advance payments for goods or services for use in research and
      development activities should be deferred and capitalized. EITF 07-3 is
      effective for us beginning in the first quarter of fiscal year 2008. We are
      currently evaluating the impact of the provisions of EITF 07-3 on our financial
      position, results of operations and cash flows and therefore, the impact of
      the
      adoption is unknown at this time.





Other
      accounting standards that may have been issued or proposed by the FASB or other
      standards-setting bodies are not expected to have a material impact on the
      Company’s consolidated financial statements.





**Risk
      Factors**




We
      have
      described below a number of uncertainties and risks which, in addition to
      uncertainties and risks presented elsewhere in this annual report may adversely
      affect our business, operating results and financial condition. The
      uncertainties and risks enumerated below as well as those presented elsewhere
      in
      this annual report should be considered carefully in evaluating our company
      and
      our business and the value of our securities.





WE
      HAVE
      ACCUMULATED LOSSES SINCE OUR INCEPTION AND CURRENTLY HAVE NO PRODUCTS OR
      SERVICES ON THE MARKET THAT ARE GENERATING REVENUES.





Our
      inability to generate revenues and profits from products we have recently
      introduced onto the market could cause us to go out of business and could cause
      our stockholders to lose their entire investment. We have not had any revenues
      for the past four years. To date, we have engaged primarily in research,
      development and clinical testing. We have not been profitable, and we cannot
      be
      certain that we will ever achieve or sustain profitability. We have incurred
      a
      cumulative net loss of approximately $6,575,000 from the beginning of the
      Successor Period through December 31, 2007. Our failure to generate meaningful
      revenues and ultimately profits from potential products and applications of
      our
      technology could force us to raise additional capital which may not be available
      or available on acceptable terms. This could ultimately reduce or suspend our
      operations and ultimately cause us to go out of business. Developing our product
      candidates will require significant additional research and development,
      including non-clinical testing and clinical trials, as well as regulatory
      approval. We expect these activities, together with our general and
      administrative expenses, to result in operating losses for the foreseeable
      future.





WE
      MAY
      REQUIRE ADDITIONAL FINANCING TO SUSTAIN OUR OPERATIONS AND WITHOUT IT WE MAY
      NOT
      BE ABLE TO CONTINUE OPERATIONS.




We
      had an
      operating cash flow deficit of approximately $1,460,000 for the fiscal year
      ended December 31, 2007 and have incurred a cumulative operating cash flow
      deficit of approximately $3,285,000 from the beginning of the Successor Period
      until December 31, 2007. For
      the fiscal year ended December 31, 2007, the Company received cash proceeds
      of
      approximately $5,514,000 in common stock and approximately $973,000 in
      convertible preferred stock, net of issuance fees and expenses, offset by
      expenses incurred in operations, principally in personnel costs, clinical trial
      expenses and professional fees.




28




We
      may
      still need additional capital to fully implement our business, operating and
      development plans. Should the financing we require to sustain our working
      capital needs be unavailable or prohibitively expensive when we require it,
      the
      consequences would be a material adverse effect on our business, financial
      condition, results of operations and cash flows.





WE
      MAY
      FACE INTENSE COMPETITION FROM COMPANIES THAT HAVE GREATER FINANCIAL, PERSONNEL
      AND RESEARCH AND DEVELOPMENT RESOURCES.





These
      competitive forces may impact our projected growth and ability to generate
      revenues and profits, which would have a negative impact on our business and
      the
      value of your investment. Our competitors may be developing products which
      compete with the WavSTAT  and
      LUMA
      Systems. Our commercial opportunities would then be reduced or eliminated should
      our competitors develop and market products for any of the diseases that we
      target that;





·
            Are
                more effective;





·
            Are
                less expensive than the products or product candidates we are
                developing.





Even
      if
      we are successful in developing effective WavSTAT and LUMA Systems, and we
      obtain FDA and other regulatory approvals necessary for commercializing them,
      our products may not compete effectively with other successful products.
      Researchers are continually learning more about diseases, which may lead to
      new
      technologies and tools for analysis. Our competitors may succeed in developing
      and marketing products either that are more effective than those that we may
      develop, alone or with our collaborators, that are marketed before any products
      we develop are brought to market, or that are as effective but less costly
      than
      our products.





Our
      competitors include fully integrated medical device companies, universities
      and
      public and private research institutions. Many of the organizations competing
      with us, have substantially greater capital resources, larger research and
      development staffs and facilities, greater experience in product development
      and
      in obtaining regulatory approvals, and greater marketing capabilities than
      we
      do.





The
      market for medical devices is intensely competitive. Many of our potential
      competitors have longer operating histories, greater name recognition, more
      employees, and significantly greater financial, technical, marketing, public
      relations, and distribution resources than we have. This intense competitive
      environment may require us to make changes in our products, pricing, licensing,
      services or marketing to develop, maintain and extend our current technology.
      Price concessions or the emergence of other pricing or distribution strategies
      of competitors may diminish our revenues, adversely impact our margins or lead
      to a reduction in our market share, any of which may harm our
      business.




OUR WavSTAT AND
      LUMA
      SYSTEMS TECHNOLOGY MAY BECOME OBSOLETE.





Our
      WavSTAT and LUMA Systems products may be made unmarketable by new scientific
      or
      technological developments where new treatment modalities are introduced that
      are more efficacious or more economical than our WavSTAT and LUMA System
      products. Any one of our competitors could develop a more effective product
      which would render our technology obsolete.




29




WE
      ARE
      DEPENDENT FOR OUR SUCCESS ON A KEY EXECUTIVE OFFICER.





Our
      success depends to a critical extent on the continued services of our Chief
      Executive Officer, Jim Hitchin. If we lost this key executive officer, we would
      be forced to expend significant time and money in the pursuit of a replacement,
      which would result in both a delay in the implementation of our business plan
      and the diversion of limited working capital. We can give you no assurance
      that
      we could find a satisfactory replacement for this key executive officer at
      all,
      or on terms that are not unduly expensive or burdensome. We do not have an
      employment agreement with Mr. Hitchin and his employment is severable by either
      party at will. We currently carry a key man life insurance policy on him in
      the
      amount of $2,000,000.





OUR
      INABILITY TO ATTRACT AND RETAIN QUALIFIED PERSONNEL COULD IMPEDE OUR ABILITY
      TO
      GENERATE REVENUES AND PROFITS AND TO OTHERWISE IMPLEMENT OUR BUSINESS PLAN
      AND
      GROWTH STRATEGIES, WHICH WOULD HAVE A NEGATIVE IMPACT ON OUR BUSINESS AND COULD
      ADVERSELY AFFECT THE VALUE OF YOUR INVESTMENT.





We
      currently have a staff of thirteen full time employees, consisting of, among
      others, our Chief Executive Officer, Chief Financial Officer, Director of Sales
      and Marketing, Operations Manager, two Clinical Study/Product Engineer Managers,
      a Chief Engineer, Director of Regulatory Affairs and an Export Sales Manager
      as
      well as administrative employees other personnel employed on a contract basis.
      Although we believe that these employees, together with the consultants
      currently engaged by the Company, will be able to handle most of our additional
      administrative, research and development and business development in the near
      term, we will nevertheless be required over the longer-term to hire highly
      skilled managerial, scientific and administrative personnel to fully implement
      our business plan and growth strategies. We cannot assure you that we will
      be
      able to engage the services of such qualified personnel at competitive prices
      or
      at all, particularly given the risks of employment attributable to our limited
      financial resources and lack of an established track record.





WE
      PLAN
      TO GROW VERY RAPIDLY, WHICH WILL PLACE STRAINS ON OUR MANAGEMENT TEAM AND OTHER
      COMPANY RESOURCES TO BOTH IMPLEMENT MORE SOPHISTICATED MANAGERIAL, OPERATIONAL
      AND FINANCIAL SYSTEMS, PROCEDURES AND CONTROLS AND TO TRAIN AND MANAGE THE
      PERSONNEL NECESSARY TO IMPLEMENT THOSE FUNCTIONS. OUR INABILITY TO MANAGE OUR
      GROWTH COULD IMPEDE OUR ABILITY TO GENERATE REVENUES AND PROFITS AND TO
      OTHERWISE IMPLEMENT OUR BUSINESS PLAN AND GROWTH STRATEGIES, WHICH WOULD HAVE
      A
      NEGATIVE IMPACT ON OUR BUSINESS AND THE VALUE OF YOUR INVESTMENT.





We
      will
      need to significantly expand our operations to implement our longer-term
      business plan and growth strategies. We will also be required to manage multiple
      relationships with various strategic partners, technology licensors, customers,
      manufacturers and suppliers, consultants and other third parties. This expansion
      and these expanded relationships will require us to significantly improve or
      replace our existing managerial, operational and financial systems, procedures
      and controls; to improve the coordination between our various corporate
      functions; and to manage, train, motivate and maintain a growing employee base.
      The time and costs to effectuate these steps may place a significant strain
      on
      our management personnel, systems and resources, particularly given the limited
      amount of financial resources and skilled employees that may be available at
      the
      time. We cannot assure you that we will institute, in a timely manner or at
      all,
      the improvements to our managerial, operational and financial systems,
      procedures and controls necessary to support our anticipated increased levels
      of
      operations and to coordinate our various corporate functions, or that we will
      be
      able to properly manage, train, motivate and retain the anticipated increased
      number of employees.




30




THE
      COMPANY MAY HAVE DIFFICULTY IN DEVELOPING AND RETAINING AN EFFECTIVE SALES
      FORCE
      OR IN OBTAINING EFFECTIVE DISTRIBUTION PARTNERS AND MAY NOT BE ABLE TO ACHIEVE
      SUFFICIENT REVENUES TO EFFECT ITS BUSINESS PLAN





The
      market for skilled sales and marketing personnel is highly competitive and
      specialized. If we are unable to hire and retain skilled and knowledgeable
      sales
      people it may negatively impact our ability to introduce our products or
      generate revenue sufficient to affect our future business plans. In addition
      our
      inability to develop business relationships with key technical distributors
      may
      also negatively impact our ability to successfully market our
      products.





THE
      COMPANY MAY BE UNSUCCESSFUL IN COMMERCIALIZING THE LUMA ASSETS





With
      the
      successful acquisition of LUMA we will have to rapidly assess and redeploy
      its
      assets, primarily intellectual property, to successfully commercialize the
      LUMA
      products. Our limited number of technical and marketing personnel, and our
      limited budget, may be inadequate for the task.





WE
      MAY
      HAVE DIFFICULTY IN ATTRACTING AND RETAINING MANAGEMENT AND OUTSIDE INDEPENDENT
      MEMBERS TO OUR BOARD OF DIRECTORS AS A RESULT OF THEIR CONCERNS RELATING TO
      THEIR INCREASED PERSONAL EXPOSURE TO LAWSUITS AND STOCKHOLDER CLAIMS BY VIRTUE
      OF HOLDING THESE POSITIONS IN A PUBLICLY-HELD COMPANY.





The
      directors and management of publicly traded corporations are increasingly
      concerned with the extent of their personal exposure to lawsuits and stockholder
      claims, as well as governmental and creditor claims which may be made against
      them, particularly in view of recent changes in securities laws imposing
      additional duties, obligations and liabilities on management and directors.
      Due
      to these perceived risks, directors and management are also becoming
      increasingly concerned with the availability of directors and officers liability
      insurance to pay on a timely basis the costs incurred in defending such claims.
      We currently carry directors and officers liability insurance, but such
      insurance is expensive and can be difficult to obtain. If we are unable to
      obtain directors and officers liability insurance at affordable rates or at
      all
      in the future, it may become increasingly more difficult to attract and retain
      qualified outside directors to serve on our board of directors. The fees of
      directors are also rising in response to their increased duties, obligations
      and
      liabilities as well as increased exposure to such risks. As a company with
      a
      limited operating history and limited resources, we will have a more difficult
      time attracting and retaining management and outside independent directors
      than
      a more established company due to these enhanced duties, obligations and
      liabilities.





IF
      WE
      FAIL TO COMPLY WITH EXTENSIVE REGULATIONS ENFORCED BY DOMESTIC AND FOREIGN
      REGULATORY AUTHORITIES, THE COMMERCIALIZATION OF OUR PRODUCTS COULD BE PREVENTED
      OR DELAYED.





Our
      WavSTAT and LUMA Systems are subject to extensive government regulations related
      to development, testing, manufacturing and commercialization in the United
      States and other countries. The determination of when and whether a product
      is
      ready for large scale purchase and potential use will be made by the government
      through consultation with a number of governmental agencies, including the
      FDA,
      the National Institutes of Health, and the Centers for Disease Control and
      Prevention. Some of our product candidates are in the clinical stages of
      development and have not received required regulatory approval from the FDA
      for
      the esophageal or lung applications we hope to commercially market. The process
      of obtaining and complying with FDA and other governmental regulatory approvals
      and regulations is costly, time consuming, uncertain and subject to
      unanticipated delays. Despite the time and expense incurred, regulatory approval
      is never guaranteed. We also are subject to the following risks and obligations,
      among others.




31




·
              The
                  FDA may refuse to approve an application if they believe that applicable
                  regulatory criteria are not
                  satisfied





·
            The
                FDA may require additional testing for safety and
                effectiveness





·
            The
                FDA may interpret data from pre-clinical testing and clinical trials
                in
                different ways than we interpret
                them





·
            If
                regulatory approval of a product is granted, the approval may be
                limited
                to specific indications or limited with respect to its
                distribution





·
            The
                FDA may change their approval policies and/or adopt new
                regulations





Failure
      to comply with these or other regulatory requirements of the FDA may subject
      us
      to administrative or judicially imposed sanctions, including:





·
            warning
                letters





·
            civil
                penalties





·
            criminal
                penalties





·
            injunctions





·
            product
                seizure or detention





·
            product
                recalls





·
            total
                or partial suspension of production





DELAYS
      IN
      SUCCESSFULLY COMPLETING OUR CLINICAL TRIALS COULD JEOPARDIZE OUR ABILITY TO
      OBTAIN REGULATORY APPROVAL OR MARKET OUR WavSTAT AND LUMA SYSTEM CANDIDATES
      ON A
      TIMELY BASIS.





Our
      business prospects will depend on our ability to complete clinical trials,
      obtain satisfactory results, obtain required regulatory approvals and
      successfully commercialize our WavSTAT and LUMA System product candidates.
      Completion of our clinical trials, announcement of results of the trials and
      our
      ability to obtain regulatory approvals could be delayed for a variety of
      reasons, including:





·
            Unsatisfactory
                results of any clinical trial





·
            The
                failure of our principal third-party investigators to perform our
                clinical
                trials on our anticipated schedules




32


·
            Different
                interpretations of our pre-clinical and clinical data, which could
                initially lead to inconclusive
                results





OUR
      DEVELOPMENT COSTS WILL INCREASE IF WE HAVE MATERIAL DELAYS IN ANY CLINICAL
      TRIAL
      OR IF WE NEED TO PERFORM MORE OR LARGER CLINICAL TRIALS THAN
      PLANNED.





If
      the
      delays are significant, or if any of our WavSTAT System or LUMA product
      candidates do not prove to be safe or effective or do not receive required
      regulatory approvals, our financial results and the commercial prospects for
      our
      product candidates will be harmed. Furthermore, our inability to complete our
      clinical trials in a timely manner could jeopardize our ability to obtain
      regulatory approval.





THE
      INDEPENDENT CLINICAL INVESTIGATORS THAT WE RELY UPON TO CONDUCT OUR CLINICAL
      TRIALS MAY NOT BE DILIGENT, CAREFUL OR TIMELY, AND MAY MAKE MISTAKES, IN THE
      CONDUCT OF OUR CLINICAL TRIALS.





We
      depend
      on independent clinical investigators to conduct our clinical trials. The
      investigators are not our employees, and we cannot control the amount or timing
      of resources that they devote to our product development programs. If
      independent investigators fail to devote sufficient time and resources to our
      product development programs, or if their performance is substandard, it may
      delay FDA approval of our products. These independent investigators may also
      have relationships with other commercial entities, some of which may compete
      with us. If these independent investigators assist our competitors at our
      expense, it could harm our competitive position.





OUR
      PRODUCT DEVELOPMENT EFFORTS MAY NOT YIELD MARKETABLE PRODUCTS DUE TO RESULTS
      OF
      STUDIES OR TRIALS, FAILURE TO ACHIEVE REGULATORY APPROVALS OR MARKET ACCEPTANCE,
      PROPRIETARY RIGHTS OF OTHERS OR MANUFACTURING ISSUES.





Our
      success depends on our ability to successfully develop and obtain regulatory
      approval to market new products. We expect that a significant portion of the
      research that we will conduct will involve new and unproven technologies.
      Development of a product requires substantial technical, financial and human
      resources even if the product is not successfully completed.





Our
      potential products may appear to be promising at various stages of development
      yet fail to reach the market for a number of reasons, including
      the:





·
            Lack
                of adequate quality or sufficient prevention benefit, or unacceptable
                safety during pre-clinical studies or clinical
                trials





·
            Failure
                to receive necessary regulatory
                approvals





·
            Existence
                of proprietary rights of third parties;
                and/or





·
            Inability
                to develop manufacturing methods that are efficient, cost-effective
                and
                capable of meeting stringent regulatory
                standards.





OUR
      INABILITY TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS COULD NEGATIVELY IMPACT
      OUR PROJECTED GROWTH AND ABILITY TO GENERATE REVENUES AND PROFITS, WHICH WOULD
      HAVE A NEGATIVE IMPACT ON OUR BUSINESS AND THE VALUE OF YOUR
      INVESTMENT.




33




We
      rely
      on a combination of patent, patent pending, copyright, trademark and trade
      secret laws, proprietary rights agreements and non-disclosure agreements to
      protect our intellectual properties. We cannot give you any assurance that
      these
      measures will prove to be effective in protecting our intellectual
      properties.





In
      the
      case of patents, we cannot give you any assurance that our existing patents
      will
      not be invalidated, that any patents that we currently or prospectively apply
      for will be granted, or that any of these patents will ultimately provide
      significant commercial benefits. Further, competing companies may circumvent
      any
      patents that we may hold by developing products which closely emulate but do
      not
      infringe our patents. While we currently have and intend to seek patent
      protection for our products in selected foreign countries, those patents may
      not
      receive the same degree of protection as they would in the United States. We
      can
      give you no assurance that we will be able to successfully defend our patents
      and proprietary rights in any action we may file for patent infringement.
      Similarly, we cannot give you any assurance that we will not be required to
      defend against litigation involving the patents or proprietary rights of others,
      or that we will be able to obtain licenses for these rights. Legal and
      accounting costs relating to prosecuting or defending patent infringement
      litigation may be substantial.





The
      WavSTAT System is protected by eight issued patents, in the United States,
      Canada, Europe and Japan, which we own, and one additional patent for which
      we
      own the exclusive license. In October 2006, the Company filed for a patent
      entitled “System and Method for Non-Endoscopic Optical Biopsy Detection of
      Diseased Tissue”. Our LUMA system is the subject of 51
      patent
      applications worldwide, 28 of which have issued, with
      a
      Notice of Allowance from the U.S. Patent and Trademark Office on 2 additional
      applications and 21
      patents are pending.





We
      also
      rely on proprietary designs, technologies, processes and know-how not eligible
      for patent protection. We cannot give you any assurance that our competitors
      will not independently develop the same or superior designs, technologies,
      processes and know-how.





While
      we
      have and will continue to enter into proprietary rights agreements with our
      employees and third parties giving us proprietary rights to certain technology
      developed by those employees or parties while engaged by the Company, we can
      give you no assurance that courts of competent jurisdiction will enforce those
      agreements.





THE
      PATENTS WE OWN COMPRISE A LARGE PORTION OF OUR ASSETS, WHICH COULD LIMIT OUR
      FINANCIAL VIABILITY.





The
      WavSTAT System is protected by eight issued patents, in the United States,
      Canada, Europe and Japan, and an additional patent for which we own an exclusive
      license. One of the eight patents has lapsed for failure to pay maintenance
      fees, and we are in the process of reinstating the patent. We cannot assure
      you
      that we will be successful in reinstating the patent. In addition, our LUMA
      system has 28 patents that have issued worldwide with a Notice of Allowance
      from
      the U.S. Patent and Trademark Office on 2 additional applications and 21 patents
      are pending. These patents comprise approximately 30% of our assets at December
      31, 2007 of our assets. If our existing patents are invalidated or if they
      fail
      to provide significant commercial benefits, it will severely hurt our financial
      condition, as a significant percentage of our assets would lose their value.
      Further, since our patents are amortized over the course of their term until
      they expire, our assets comprised of patents will continually be written down
      until they lose value altogether.




34




LEGISLATIVE
      ACTIONS AND POTENTIAL NEW ACCOUNTING PRONOUNCEMENTS ARE LIKELY TO IMPACT OUR
      FUTURE FINANCIAL POSITION AND RESULTS OF OPERATIONS.





There
      have been regulatory changes, including the Sarbanes-Oxley Act of 2002, and
      there may potentially be new accounting pronouncements or additional regulatory
      rulings which will have an impact on our future financial position and results
      of operations. The Sarbanes-Oxley Act of 2002 and other rule changes as well
      as
      proposed legislative initiatives following the Enron bankruptcy have increased
      general and administrative costs as we have incurred increased legal and
      accounting fees to comply with such rule changes.





OUR
      PRODUCTS MAY BE SUBJECT TO RECALL OR PRODUCT LIABILITY CLAIMS.





Our
      WavSTAT and LUMA System products may be used in connection with medical
      procedures in which it is important that those products function with precision
      and accuracy. If our products do not function as designed, or are designed
      improperly, we may be forced by regulatory agencies to withdraw such products
      from the market. In addition, if medical personnel or their patients suffer
      injury as a result of any failure of our products to function as designed,
      or an
      inappropriate design, we may be subject to lawsuits seeking significant
      compensatory and punitive damages. Any product recall or lawsuit seeking
      significant monetary damages may have a material affect on our business and
      financial condition.





WE
      HAVE
      NOT PAID ANY CASH DIVIDENDS AND NO CASH DIVIDENDS WILL BE PAID IN THE
      FORESEEABLE FUTURE.





We
      do not
      anticipate paying cash dividends on our Common Stock in the foreseeable future,
      and we cannot assure an investor that funds will be legally available to pay
      dividends, or that even if the funds are legally available, that the dividends
      will be paid.





THE
      APPLICATION OF THE "PENNY STOCK" RULES COULD ADVERSELY AFFECT THE MARKET PRICE
      OF OUR COMMON STOCK AND INCREASE YOUR TRANSACTION COSTS TO SELL THOSE
      STOCK.





As
      long
      as the trading price of our Common Stock is below $5 per share, the open-market
      trading of our Common Stock will be subject to the "penny stock" rules. The
      "penny stock" rules impose additional sales practice requirements on
      broker-dealers who sell securities to persons other than established customers
      and accredited investors (generally those with assets in excess of $1,000,000
      or
      annual income exceeding $200,000 or $300,000 together with their spouse). For
      transactions covered by these rules, the broker-dealer must make a special
      suitability determination for the purchase of securities and have received
      the
      purchaser's written consent to the transaction before the purchase.
      Additionally, for any transaction involving a penny stock, unless exempt, the
      broker-dealer must deliver, before the transaction, a disclosure schedule
      prescribed by the SEC relating to the penny stock market. The broker-dealer
      also
      must disclose the commissions payable to both the broker-dealer and the
      registered representative and current quotations for the securities. Finally,
      monthly statements must be sent disclosing recent price information on the
      limited market in penny stocks. These additional burdens imposed on
      broker-dealers may restrict the ability or decrease the willingness of
      broker-dealers to sell our Common Stock, and may result in decreased liquidity
      for our Common Stock and increased transaction costs for sales and purchases
      of
      our Common Stock as compared to other securities.




35





OUR
      COMMON STOCK IS THINLY TRADED, SO INVESTORS MAY BE UNABLE TO SELL AT OR NEAR
      ASK
      PRICES OR AT ALL.





Our
      Common Stock has historically been sporadically or "thinly-traded", meaning
      that
      the number of persons interested in purchasing our Common Stock at or near
      ask
      prices at any given time may be relatively small or non-existent. As of March
      24, 2008, our average trading volume per day for the past three months was
      approximately 10,000 shares a day with a high of 31,000 shares traded and a
      low
      of 0 shares traded per day. This situation is attributable to a number of
      factors, including the fact that we are a small company which is relatively
      unknown to stock analysts, stock brokers, institutional investors and others
      in
      the investment community that generate or influence sales volume, and that
      even
      if we came to the attention of such persons, they tend to be risk-averse and
      would be reluctant to follow an unproven company such as ours or purchase or
      recommend the purchase of our shares until such time as we became more seasoned
      and viable. As a consequence, there may be periods of several days or more
      when
      trading activity in our shares is minimal or non-existent, as compared to a
      seasoned issuer which has a large and steady volume of trading activity that
      will generally support continuous sales without an adverse effect on share
      price. We cannot give you any assurance that a broader or more active public
      trading market for our Common Stock will develop or be sustained, or that
      current trading levels will be sustained.





THE
      MARKET PRICE FOR OUR COMMON STOCK IS PARTICULARLY VOLATILE, GIVEN OUR STATUS
      AS
      A RELATIVELY UNKNOWN COMPANY WITH A SMALL AND THINLY-TRADED PUBLIC FLOAT,
      LIMITED OPERATING HISTORY AND LACK OF REVENUES WHICH COULD LEAD TO WIDE
      FLUCTUATIONS IN OUR SHARE PRICE. THE PRICE AT WHICH YOU PURCHASE OUR COMMON
      STOCK MAY NOT BE INDICATIVE OF THE PRICE THAT WILL PREVAIL IN THE TRADING
      MARKET. AN INVESTOR MAY BE UNABLE TO SELL COMMON STOCK AT OR ABOVE THE PURCHASE
      PRICE, WHICH MAY RESULT IN SUBSTANTIAL LOSSES.





The
      market for our Common Stock is characterized by significant price volatility
      when compared to seasoned issuers, and we expect that our share price will
      continue to be more volatile than a seasoned issuer for the indefinite future.
      In fact, during the ninety-day period ended March 24, 2008, the high and low
      closing prices of a share of our Common Stock were $1.05 and $0.70,
      respectively. The volatility in our share price is attributable to a number
      of
      factors. First, as noted above, our stock is sporadically and/or thinly-traded.
      As a consequence of this lack of liquidity, the trading of relatively small
      quantities of shares by our stockholders may disproportionately influence the
      price of those shares in either direction. The price for our shares could,
      for
      example, decline precipitously in the event that a large number of our shares
      are sold on the market without commensurate demand, as compared to a seasoned
      issuer which could better absorb those sales without adverse impact on its
      share
      price. Secondly, we are a speculative or "risky" investment due to our limited
      operating history and lack of revenues or profits to date and uncertainty of
      future market acceptance for our potential products. As a consequence of this
      enhanced risk, more risk-adverse investors may, under the fear of losing all
      or
      most of their investment in the event of negative news or lack of progress,
      be
      more inclined to sell their shares on the market more quickly and at greater
      discounts than would be the case with the stock of a seasoned issuer. The
      following factors may add to the volatility in the price of our Common Stock:
      actual or anticipated variations in our quarterly or annual operating results;
      acceptance of our proprietary technology; government regulations, announcements
      of significant acquisitions, strategic partnerships or joint ventures; our
      capital commitments; and additions or departures of our key personnel. Many
      of
      these factors are beyond our control and may decrease the market price of our
      Common Stock, regardless of our operating performance. We cannot make any
      predictions or projections as to what the prevailing market price for our Common
      Stock will be at any time, including as to whether our Common Stock will sustain
      their current market prices, or as to what effect that the sale of shares or
      the
      availability of Common Stock for sale at any time will have on the prevailing
      market price.




36





Shareholders
      should be aware that, according to SEC Release No. 34-29093, the market for
      penny stocks has suffered in recent years from patterns of fraud and abuse.
      Such
      patterns include (1) control of the market for the security by one or a few
      broker-dealers that are often related to the promoter or issuer; (2)
      manipulation of prices through prearranged matching of purchases and sales
      and
      false and misleading press releases; (3) boiler room practices involving
      high-pressure sales tactics and unrealistic price projections by inexperienced
      sales persons; (4) excessive and undisclosed bid-ask differential and markups
      by
      selling broker-dealers; and (5) the wholesale dumping of the same securities
      by
      promoters and broker-dealers after prices have been manipulated to a desired
      level, along with the resulting inevitable collapse of those prices and with
      consequent investor losses. Our management is aware of the abuses that have
      occurred historically in the penny stock market. Although we do not expect
      to be
      in a position to dictate the behavior of the market or of broker-dealers who
      participate in the market, management will strive within the confines of
      practical limitations to prevent the described patterns from being established
      with respect to our securities. The occurrence of these patterns or practices
      could increase the volatility of our share price.





VOLATILITY
      IN OUR COMMON STOCK PRICE MAY SUBJECT US TO SECURITIES LITIGATION.





The
      market for our Common Stock is characterized by significant price volatility
      when compared to seasoned issuers, and we expect that our share price will
      continue to be more volatile than a seasoned issuer for the indefinite future.
      In the past, plaintiffs have sometimes initiated securities class action
      litigation against a company following periods of volatility in the market
      price
      of its securities. We may in the future be the target of similar litigation.
      Securities litigation could result in substantial costs and liabilities and
      could divert management's attention and resources.





OUR
      OFFICERS AND DIRECTORS OWN OR CONTROL APPROXIMATELY 30% (INCLUDING ALL OPTIONS
      EXERCISABLE WITHIN 60 DAYS OF March 27, 2008) OF OUR OUTSTANDING COMMON STOCK,
      WHICH MAY LIMIT THE ABILITY OF OTHER STOCKHOLDERS, WHETHER ACTING SINGLY OR
      TOGETHER, TO PROPOSE OR DIRECT THE MANAGEMENT OR OVERALL DIRECTION OF THE
      COMPANY. ADDITIONALLY, THIS CONCENTRATION OF OWNERSHIP COULD DISCOURAGE OR
      PREVENT A POTENTIAL TAKEOVER OF THE COMPANY THAT MIGHT OTHERWISE RESULT IN
      STOCKHOLDERS RECEIVING A PREMIUM OVER THE MARKET PRICE FOR THEIR COMMON
      STOCK.





As
      of
      March 27, 2008, our officers and directors beneficially own or control
      approximately 30% (including all options exercisable within sixty days of March
      27, 2008) of our outstanding Common Stock. These persons will have the ability
      to control substantially all matters submitted to our stockholders for approval
      and to control our management and affairs, including extraordinary transactions
      such as mergers and other changes of corporate control, and going private
      transactions.





A
      LARGE
      NUMBER OF SHARES OF COMMON STOCK ARE ISSUABLE UPON EXERCISE OF OUTSTANDING
      OPTIONS. THE EXERCISE OF THESE SECURITIES COULD RESULT IN THE SUBSTANTIAL
      DILUTION OF THE INVESTMENT OF OTHER STOCKHOLDERS IN TERMS OF PERCENTAGE
      OWNERSHIP IN THE COMPANY AS WELL AS THE BOOK VALUE OF THE COMMON STOCK. THE
      SALE
      OF A LARGE AMOUNT OF COMMON STOCK RECEIVED UPON EXERCISE OF THESE OPTIONS ON
      THE
      PUBLIC MARKET TO FINANCE THE EXERCISE PRICE OR TO PAY ASSOCIATED INCOME TAXES,
      OR THE PERCEPTION THAT SUCH SALES COULD OCCUR, COULD SUBSTANTIALLY DEPRESS
      THE
      PREVAILING MARKET PRICES FOR OUR STOCK.




37




As
      of
      March 27, 2008, there are outstanding common stock purchase options entitling
      the holders to purchase 5,795,000 shares of Common Stock at a weighted average
      exercise price of $0.70 per share (3,511,667 of these shares are exercisable
      within the next 60 days). The exercise price for all of the aforesaid options
      may be less than your cost to acquire our Common Stock. In the event of the
      exercise or conversion of these securities, you could suffer substantial
      dilution of your investment in terms of your percentage ownership in the company
      as well as the book value of your Common Stock. In addition, the holders of
      the
      common share purchase options may sell Common Stock in tandem with their
      exercise of those options to finance that exercise, or may resell the shares
      purchased in order to cover any income tax liabilities that may arise from
      their
      exercise of the options **.**





OUR
      ISSUANCE OF ADDITIONAL COMMON STOCK, OR OPTIONS TO PURCHASE OUR STOCK, WOULD
      DILUTE YOUR PROPORTIONATE OWNERSHIP AND VOTING RIGHTS.





We
      are
      entitled under our articles of incorporation to issue up to 125,000,000 shares
      of capital stock, including 100,000,000 shares of Common Stock and 22,750,000
      undesignated shares (i.e. shares that may be designated as in a senior position
      to the current stock). After taking into consideration our outstanding Common
      Stock at March 27, 2008, we will be entitled to issue up to 20,474,548
      (100,000,000 authorized less shares outstanding of 67,608,372,
      10,141,256 shares reserved for issuance of stock options, 1,000,000 shares
      reserved for assumed future conversion of warrants to purchase 250,000 shares
      of
      Series A Convertible Preferred Stock and 775,824 shares reserved for placement
      agent warrants)additional shares of Common Stock and up to 22,750,000
      shares of undesignated capital stock. Our board of directors may generally
      issue
      stock, or options or warrants to purchase those shares, without further approval
      by our stockholders based upon such factors as our board of directors may deem
      relevant at that time. It is likely that we will be required to issue a large
      amount of additional securities to raise capital to further our development.
      It
      is also likely that we will be required to issue a large amount of additional
      securities to directors, officers, employees and consultants as compensatory
      grants in connection with their services, both in the form of stand-alone grants
      or under our stock plans. We cannot give you any assurance that we will not
      issue additional Common Stock, or options or warrants to purchase those shares,
      under circumstances we may deem appropriate at the time.





THE
      LIMITATION OF MONETARY LIABILITY OF OUR DIRECTORS, OFFICERS AND EMPLOYEES UNDER
      OUR ARTICLES OF INCORPORATION AND THE INDEMNIFICATION RIGHTS OF OUR DIRECTORS,
      OFFICERS, CONSULTANTS AND EMPLOYEES MAY RESULT IN SUBSTANTIAL EXPENDITURES
      BY
      OUR COMPANY AND MAY DISCOURAGE LAWSUITS AGAINST OUR DIRECTORS, OFFICERS,
      CONSULTANTS AND EMPLOYEES.





Our
      articles of incorporation contain provisions which eliminate the liability
      of
      our directors for monetary damages to the Company and stockholders. Our bylaws
      also require us to indemnify our officers and directors. We may also have
      contractual indemnification obligations under our agreements with our directors,
      officers, consultants and employees. The foregoing indemnification obligations
      could result in our company incurring substantial expenditures to cover the
      cost
      of settlement or damage awards against directors, officers, consultants and
      employees, which we may be unable to recoup. These provisions and resultant
      costs may also discourage the Company from bringing a lawsuit against directors,
      officers, consultants and employees for breaches of their fiduciary duties,
      and
      may similarly discourage the filing of derivative litigation by our stockholders
      against our directors, officers, consultants and employees even though such
      actions, if successful, might otherwise benefit the Company and
      stockholders.




38




ANTI-TAKEOVER
      PROVISIONS MAY IMPEDE THE ACQUISITION OF OUR COMPANY.





Certain
      provisions of the Minnesota Business Corporation Act and other Minnesota laws
      have anti-takeover effects and may inhibit a non-negotiated merger or other
      business combination. These provisions are intended to encourage any person
      interested in acquiring us to negotiate with, and to obtain the approval of,
      our
      Board of Directors in connection with such a transaction. However, certain
      of
      these provisions may discourage a future acquisition of the Company, including
      an acquisition in which the stockholders might otherwise receive a premium
      for
      their shares. As a result, stockholders who might desire to participate in
      such
      a transaction may not have the opportunity to do so.




39




ITEM
      7.
      FINANCIAL STATEMENTS .





Consolidated
      audited financial statements for the years ended December 31, 2007 and 2006,
      and
      for the period from inception (August 2, 2004) to December 31, 2007 are filed
      as
      part of this Form 10-KSB.




SpectraScience,
      Inc. and Subsidiary


(A
      Development Stage Enterprise)





Consolidated
      Financial Statements





Years
      Ended December 31, 2007, and 2006




PageReport
                  of Independent Registered Public Accounting Firm
              
              
              41Consolidated
                  Balance Sheets as of December 31, 2007 and 2006
              
              
              42Consolidated
                  Statements of Operations for the years ended December 31, 2007
                  and 2006,
                  and from August 2, 2004 (Inception of Successor Company) to December
                  31,
                  2007
              
              
              43Consolidated
                  Statements of Stockholders’ Equity from August 2, 2004 (Inception of
                  Successor Company) to December 31, 2007
              
              
              44Consolidated
                  Statements of Cash Flows for the years ended December 31, 2007
                  and 2006,
                  and from August 2, 2004 (Inception of Successor Company) to December
                  31,
                  2007
              
              
              45Notes
                  to Consolidated Financial Statements
              
              
              46




40




***Report
      of Independent Registered Public Accounting Firm***




To
      the
      Stockholders and Board of Directors


SpectraScience,
      Inc.




We
      have
      audited the accompanying consolidated balance sheets of SpectraScience, Inc.
      and
      subsidiary (a development stage enterprise) as of December 31, 2007 and 2006,
      and the related consolidated statements of operations, stockholders’ equity and
      cash flows for the years ended December 31, 2007 and 2006, and from August
      2,
      2004 (inception of Successor Company) to December 31, 2007. These consolidated
      financial statements are the responsibility of the Company’s management. Our
      responsibility is to express an opinion on these consolidated financial
      statements based on our audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. An audit includes examining,
      on a
      test basis, evidence supporting the amounts and disclosures in the financial
      statements. An audit also includes assessing the accounting principles used
      and
      significant estimates made by management, as well as evaluating the overall
      financial statement presentation. We believe that our audits provide a
      reasonable basis for our opinion.





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of SpectraScience, Inc. and
      subsidiary as of December 31, 2007 and 2006, and their results of operations
      and
      cash flows for the years ended December 31, 2007 and 2006, and from August
      2,
      2004 (inception of Successor Company) to December 31, 2007, in conformity with
      accounting principles generally accepted in the United States of
      America.







/s/
      J.H.
      Cohn LLP





San
      Diego, California


March
      27,
      2008




41


SpectraScience,
      Inc. and Subsidiary


(A
      Development Stage Enterprise)


Consolidated
      Balance Sheets


December
      31, 2007 and 2006




December
                31,
              2007
            
            December
                31,
              2006ASSETSCurrent
                assets:Cash
                and cash equivalents
            
            $
            5,188,177
            
            $
            174,802Inventories
            
            
            1,044,856
            
            
            123,981Prepaid
                expenses and other current assets
            
            
            41,437
            
            
            50,933Total
                current assets
            
            
            6,274,470
            
            
            349,716Fixed
                assets, net
            
            
            943,482
            
            
            -Patents,
                net
            
            
            3,415,117
            
            
            243,062TOTAL
                ASSETS
            
            $
            10,633,069
            
            $
            592,778LIABILITIES
                AND STOCKHOLDERS’ EQUITYCurrent
                liabilities:Accounts
                payable
            
            $
            155,051
            
            $
            57,689Accrued
                compensation and taxes
            
            
            12,463
            
            
            9,286Total
                liabilities
            
            
            167,514
            
            
            66,975COMMITMENTSSTOCKHOLDERS’
                EQUITYUndesignated
                capital stock, undesignated par value,22,750,000
                and 25,000,000 shares authorized at December 31, 2007 and 2006,
                respectively, none issued
            
            
            -
            
            
            -Series
                A Convertible Preferred Stock, $.01 par value:Authorized
                - 2,250,000 and 0 shares at December 31, 2007and
                2006, respectively.Issued
                and outstanding 2,000,000 shares (Aggregate
                liquidation preference $1,000,000)
            
            
            20,000
            
            
            -Common
                stock, $.01 par value:Authorized—100,000,000
                sharesIssued
                and outstanding—58,992,994 and 38,370,087 shares at December 31, 2007 and
                2006, respectively
            
            
            589,929
            
            
            383,701Additional
                paid-in capital
            
            
            16,430,997
            
            
            2,742,888Deficit
                accumulated during the development stage
            
            
            (6,575,371
            )
            
            (2,600,786
            )TOTAL
                STOCKHOLDERS’ EQUITY
            
            
            10,465,555
            
            
            525,803TOTAL
                LIABILITIES ANDSTOCKHOLDERS’
                EQUITY
            
            $
            10,633,069
            
            $
            592,778




*See
      accompanying notes to the consolidated financial statements*




42




SpectraScience,
      Inc. and Subsidiary


(A
      Development Stage Enterprise)


Consolidated
      Statements of Operations


for
      the
      years ended December 31, 2007 and 2006, and from August 2, 2004 (Inception
      of
      Successor Company) to December 31, 2007




Year
                Ended
              December
                31,
            
            August
                2, 2004 (Inception of Successor Company) to December 31,
                20072007
            
            2006Gross
                revenue
            
            $
            -
            
            $
            -
            
            $
            -Operating
                expenses:Research
                and development
            
            
            796,944
            
            
            406,300
            
            
            1,534,019General
                and administrative
            
            
            1,634,109
            
            
            930,575
            
            
            3,550,874Sales
                and marketing
            
            
            589,535
            
            
            -
            
            
            589,535Total
                operating expenses
            
            
            3,020,588
            
            
            1,336,875
            
            
            5,674,428Operating
                loss
            
            
            (3,020,588
            )
            
            (1,336,875
            )
            
            (5,674,428
            )Other
                income, net
            
            
            46,003
            
            
            26,068
            
            
            99,057Net
                loss
            
            
            (2,974,585
            )
            
            (1,310,807
            )
            
            (5,575,371
            )Deemed
                dividend on preferred stock
            
            
            (1,000,000
            )
            
            -
            
            
            (1,000,000
            )Net
                loss applicable to common stockholders
            
            $
            (3,974,585
            )
            $
            (1,310,807
            )
            $
            (6,575,371
            )Basic
                and diluted net loss per share
            
            $
            (0.10
            )
            $
            (0.03
            )Weighted
                average common shares outstanding
            
            
            41,699,789
            
            
            38,009,626




*See
      accompanying notes to the consolidated financial statements*




43


SpectraScience,
        Inc. and Subsidiary
 (A
        Development Stage Enterprise)
 Consolidated
        Statements of Stockholders’ Equity
 From
        August 2, 2004 (Inception of Successor Company) to December 31,
        2007


**Preferred
                    Stock**
                
                **Common
                    Stock**
                
                **Additional**
                  **Paid-In**
                
                **Deferred**
                
                **Deficit**
                  **Accumulated**
                  **During
                    The**
                  **Development**
                
                **Total**
                  **Stockholders’****Shares**
                
                **Amount**
                
                **Shares**
                
                **Amount**
                
                **Capital**
                
                **Compensation**
                
                **Stage**
                
                **Equity****Balance,
                    August 2, 2004**
                
                
                
                
                
                
                
                
                37,384,095
                
                $
                373,841
                
                $
                1,663,271
                
                $
                (200,756
                )
                
                
                
                $
                1,836,356Sale
                    of common stock at $0.12 per share
                
                
                
                
                
                
                
                
                166,667
                
                
                1,667
                
                
                18,333
                
                
                
                
                
                
                
                
                20,000Issuance
                    of stock options to employees
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                35,825
                
                
                (35,825
                )Compensation
                    from options issued to consultants
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                26,123
                
                
                
                
                
                
                
                
                26,123Amortization
                    of deferred compensation
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                109,328
                
                
                
                
                
                109,328Net
                    loss
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                $
                (377,691
                )
                
                (377,691
                )**Balance,
                    December 31, 2004**
                
                
                
                
                
                
                
                
                37,550,762
                
                
                375,508
                
                
                1,743,552
                
                
                (127,253
                )
                
                (377,691
                )
                
                1,614,116Compensation
                    from options issued to consultants
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                75,561
                
                
                
                
                
                
                
                
                75,561Amortization
                    of deferred compensation
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                79,113
                
                
                
                
                
                79,113Stock
                    options exercised
                
                
                
                
                
                
                
                
                21,500
                
                
                215
                
                
                3,010
                
                
                
                
                
                
                
                
                3,225Net
                    loss
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (912,288
                )
                
                (912,288
                )**Balance,
                    December 31, 2005**
                
                
                
                
                
                
                
                
                37,572,262
                
                
                375,723
                
                
                1,822,123
                
                
                (48,140
                )
                
                (1,289,979
                )
                
                859,727Compensation
                    from options issued to consultants
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                182,245
                
                
                
                
                
                
                
                
                182,245Amortization
                    of deferred compensation
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                237,175
                
                
                48,140
                
                
                
                
                
                285,315Stock
                    options exercised
                
                
                
                
                
                
                
                
                48,500
                
                
                485
                
                
                6,790
                
                
                
                
                
                
                
                
                7,275Sale
                    of common stock at $0.67 per share
                
                
                
                
                
                
                
                
                749,325
                
                
                7,493
                
                
                494,555
                
                
                
                
                
                
                
                
                502,048Net
                    loss
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (1,310,807
                )
                
                (1,310,807
                )**Balance,
                    December 31, 2006**
                
                
                
                
                
                
                
                
                38,370,087
                
                
                383,701
                
                
                2,742,888
                
                
                -
                
                
                (2,600,786
                )
                
                525,803Stock
                    based compensation - consultants
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                571,767
                
                
                
                
                
                
                
                
                571,767Stock
                    based compensation - employees
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                829,329
                
                
                
                
                
                
                
                
                829,329Stock
                    options exercised
                
                
                
                
                
                
                
                
                10,000
                
                
                100
                
                
                1,400
                
                
                
                
                
                
                
                
                1,500Issuance
                    of common stock at $0.50 per share
                
                
                
                
                
                
                
                
                2,270,000
                
                
                22,700
                
                
                1,112,300
                
                
                
                
                
                
                
                
                1,135,000Issuance
                    of preferred stock and warrants at $0.50 per share, net of
                    expenses
                
                
                2,000,000
                
                
                
                
                
                
                
                
                
                
                
                973,021
                
                
                
                
                
                
                
                
                973,021Deemed
                    dividend on preferred stock
                
                
                
                
                $
                20,000
                
                
                
                
                
                
                
                
                980,000
                
                
                
                
                
                (1,000,000
                )Issuance
                    of common stock for the assets of LUMA Imaging Corp.
                
                
                
                
                
                
                
                
                11,200,000
                
                
                112,000
                
                
                4,912,783
                
                
                
                
                
                
                
                
                5,024,783Sale
                    of common stock at $0.70 per share
                
                
                
                
                
                
                
                
                7,142,857
                
                
                71,428
                
                
                4,307,509
                
                
                
                
                
                
                
                
                4,378,937Net
                    loss
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (2,974,585
                )
                
                (2,974,585
                )**Balance,
                    December 31, 2007**
                
                
                2,000,000
                
                $
                20,000
                
                
                58,992,944
                
                $
                589,929
                
                $
                16,430,997
                
                $
                -
                
                $
                (6,575,371
                )
                $
                10,465,555




*See
      accompanying notes to the consolidated financial statements*




44




SpectraScience,
      Inc. and Subsidiary


(A
      Development Stage Enterprise)


Consolidated **** Statements
      of Cash Flows


for
      the
      years ended December 31, 2007 and 2006,


and
      from
      August 2, 2004 (Inception of Successor Company) to December 31,
      2007





Year
                Ended December 31,
            
            August
                2, 2004 ( Inception of Successor Company) to December 31,2007
            
            2006
            
            2007OPERATING
                ACTIVITIES:Net
                loss
            
            $
            (2,974,585
            )
            $
            (1,310,807
            )
            $
            (5,575,371
            )Adjustments
                to reconcile net loss to cashused
                in operating activities:Depreciation
                and amortization
            
            
            57,198
            
            
            25,961
            
            
            123,327Stock-based
                compensation employees
            
            
            829,329
            
            
            285,315
            
            
            1,303,085Stock-based
                compensation consultants
            
            
            571,767
            
            
            182,245
            
            
            855,696Gain
                on disposal of fixed assets
            
            
            (7,150
            )
            
            (12,550
            )
            
            (28,839
            )Write-off
                of obsolete inventories
            
            
            -
            
            
            16,091
            
            
            25,188Changes
                in operating assetsand
                liabilities:Prepaid
                expenses and other assets
            
            
            (36,909
            )
            
            (8,623
            )
            
            (64,092
            )Accounts
                payable
            
            
            97,362
            
            
            40,191
            
            
            95,349Accrued
                compensation and taxes
            
            
            3,177
            
            
            (5,919
            )
            
            (19,630
            )Net
                cash used in operating activities
            
            
            (1,459,811
            )
            
            (788,096
            )
            
            (3,285,287
            )INVESTING
                ACTIVITIES:Acquisition
                of fixed assets
            
            
            (22,422
            )
            
            -
            
            
            (22,422
            )Proceeds
                from the sale of assets
            
            
            7,150
            
            
            12,550
            
            
            32,891Net
                cash provided by (used in) investing activities
            
            
            (15,272
            )
            
            12,550
            
            
            10,469FINANCING
                ACTIVITIES:Net
                proceeds from issuance of common stock
            
            
            5,513,937
            
            
            502,048
            
            
            6,035,984Net
                proceeds from issuance of preferred stock
            
            
            973,021
            
            
            -
            
            
            973,021Proceeds
                from exercise of stock options
            
            
            1,500
            
            
            7,275
            
            
            12,000Net
                cash provided by financing activities
            
            
            6,488,458
            
            
            509,323
            
            
            7,021,005Net
                increase (decrease) in cash and cash equivalents
            
            
            5,013,375
            
            
            (266,223
            )
            
            3,746,187CASH
                AND CASH EQUIVALENTSAT
                BEGINNING OF PERIOD
            
            
            174,802
            
            
            441,025
            
            
            1,441,990CASH
                AND CASH EQUIVALENTSAT
                END OF PERIOD
            
            $
            5,188,177
            
            $
            174,802
            
            $
            5,188,177Supplemental
                disclosure of non-cash investing and financing activities:Issuance
                of common stock for assets of LUMA Imaging Corp.
            
            $
            5,024,783
            
            $
            -
            
            $
            5,024,783Conversion
                of notes payable and accrued interest to common stock
            
            $
            -
            
            $
            -
            
            $
            565,000Issuance
                of common stock in settlement of bankruptcy debt
            
            $
            -
            
            $
            -
            
            $
            60,000Fresh
                start adjustment to fixed assets and patents
            
            $
            -
            
            $
            -
            
            $
            255,379





*See
      accompanying notes to the consolidated financial
      statements*


45


SpectraScience,
      Inc. and Subsidiary


(A
      Development Stage Enterprise **)**




Notes
      to
      Consolidated Financial Statements




Note
      1:
      Organization and Description of Business





SpectraScience,
      Inc. was incorporated in the State of Minnesota on May 4, 1983 as GV Medical,
      Inc. In October 1992, GV Medical discontinued its prior business, refocused
      its
      development efforts and changed its name to SpectraScience, Inc. The “Company”,
      hereinafter, refers to SpectraScience, Inc. and its wholly owned subsidiary
      Luma
      Imaging Corp. From 1996, the Company primarily focused on developing the WavSTAT
      Optical Biopsy System (“WavSTAT System.”).





The
      Company has developed and received FDA approval to market a proprietary,
      minimally invasive technology that optically scans tissue in real-time to
      distinguish between normal, pre-cancerous or cancerous cells without the need
      to
      remove the subject cell tissue from the body to make such determinations. The
      WavSTAT System operates by using cool, safe UV laser light to optically scan
      and
      analyze tissue, enabling the physician to make an instant diagnosis during
      endoscopy when screening for cancer, and if warranted, to begin immediate
      treatment during the same procedure. The WavSTAT,
      is FDA approved for colon cancer detection.





On
      November 6, 2007, the
      Company acquired the assets of Luma
      Imaging Corporation (“LUMA”) in an equity transaction accounted for as an
      acquisition of assets and now operates LUMA as a wholly owned subsidiary of
      the
      Company.  LUMA
      had
      acquired the assets from a predecessor company that had developed, and received
      FDA approval for, a non-invasive diagnostic imaging system that can detect
      cervical cancer precursors and which utilizes an underlying technology that
      is
      similar to that of the WavSTAT System. The addition of the LUMA technology
      to
      the Company’s existing WavSTAT System technology provides the Company with a
      broad suite of fluorescence-based intellectual property and know-how. LUMA
      received FDA approval as an adjunct to colposcopy in March 2006.





To
      effect
      the LUMA acquisition the Company issued 11,200,000 restricted common shares
      valued at approximately $5,000,000. The valuation of the consideration of the
      approximate $5,000,000 was determined based on the underlying value of assets
      received which totaled $5,024,783, or $0.45 per share. The Company received
      assets including patents, inventory and equipment. The Company capitalized
      $3,226,000 for the fair value of the 28 patents acquired. The capitalized
      amounts were determined based upon a market-based forecast approach which
      utilized comparable assumed royalty revenue streams over several possible
      scenarios. Forecast cash flows were then discounted to present value to
      determine valuation. Inventories and equipment acquired were determined to
      have
      fair values of approximately $874,000 and $924,000, respectively.





Note
      2:
      Development Stage Enterprise





The
      Company is a development stage enterprise since it has not yet generated revenue
      from the sale of products and through December 31, 2007. Its efforts have been
      principally devoted to moving the Company forward and preparing our products
      for
      domestic and international market introduction. Activities beginning on August
      2, 2004 are deemed to be development stage operations. Accordingly, Successor
      Company activities on the accompanying financial statements reflect both period
      to date and inception to date development stage activities. As of December
      31,
      2007, the Company had working capital of approximately $6,099,000 and cash
      and
      cash equivalents of approximately $5,188,000. The Company believes that existing
      working capital balances will be sufficient to provide for operations and
      execution of its present business plans. However, the Company may incur unknown
      expenses, or the Company may not be able to meet its revenue forecasts, and
      this
      may require the Company to seek additional capital. In such an event, the
      Company may not be able to find such capital or be able to raise capital or
      debt
      on terms that are acceptable.




46




Note
      3:
      Significant Accounting Policies





*Consolidation*





The
      accompanying consolidated financial statements include the accounts of
      SpectraScience, Inc. and its wholly-owned subsidiary Luma Imaging Corp. All
      significant intercompany balances and transactions have been eliminated in
      consolidation.





*Risks
      and Uncertainties*





The
      Company operates in an industry that is subject to intense competition,
      government regulation and rapid technological change. The Company's operations
      are subject to significant risk and uncertainties including financial,
      operational, technological, regulatory and other risks associated with a
      development stage company, including the potential risk of business
      failure.





*Use
      of Estimates*





The
      Company prepares its consolidated financial statements in conformity with
      accounting principles generally accepted in the United States of America, which
      requires management to make estimates and assumptions that affect the amounts
      reported in the financial statements and disclosures made in the accompanying
      notes to the financials statements. Significant estimates made by management
      include, among others, realization of long-lived assets, assumptions used to
      value stock options, assumptions used to value the common stock issued and
      the
      assets acquired in the Luma acquisition and the realization of intangible
      assets. Actual results could differ from those estimates.




*Cash
      Equivalents*




Highly
      liquid investments with original maturities of three months or less when
      purchased are considered to be cash equivalents. Financial instruments which
      potentially subject the Company to concentrations of credit risk consist
      primarily of cash and cash equivalents. The Company maintains its cash and
      cash
      equivalents with high-credit quality financial institutions. At times, such
      amounts may exceed insured limits. At December 31, 2007, the Company had cash
      balances of approximately $4.6 million in excess of insured limits. The Company
      has not experienced any losses in such accounts and believes it is not exposed
      to any significant credit risk on its cash equivalent accounts.





*Stock-Based
      Compensation*





In
      December 2004, the Financial Accounting Standards Board issued Statement of
      Financial Accounting Standards (“SFAS”), SFAS No. 123(R), “Share-Based Payment”,
      (“SFAS 123(R)”) which establishes standards for transactions in which an entity
      exchanges its equity instruments for goods or services. SFAS 123(R) requires
      an
      issuer to measure the cost of employee services received in exchange for an
      award of equity instruments based on the grant-date fair value of the award.
      SFAS 123(R) became effective for the Company commencing January 1, 2006 using
      the modified prospective method. The Company’s 2006 results of operations
      reflects a portion of share-based awards earned during the year ended December
      31, 2006 for previously granted stock options. The Company previously adopted
      the fair value recognition provisions of SFAS 123 “Accounting for Stock-Based
      Compensation” prospectively for all employee and consultant awards granted,
      modified, or settled by the Successor Company on August 2, 2004. Accordingly,
      SFAS 123(R) has not had a material impact on the Company’s consolidated
      financial statements.




47




In
      accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force
      (“EITF”) No. 96-18, “Accounting for Equity Instruments That are Issued to Other
      Than Employees for Acquiring or in Conjunction with Selling Goods of Services,”
all issuances of common stock, stock options or other equity instruments to
      non-employees as the consideration for goods or services received by the Company
      are accounted for based on the fair value of the equity instruments issued
      (unless the fair value of the consideration received can be more reliably
      measured). Any options issued to non-employees are recorded in expense and
      additional paid-in capital in stockholders’ equity over the applicable service
      periods using variable accounting through the vesting date based on the fair
      value of the options at the end of each period. The intrinsic value of the
      options granted are assumed to be zero because the exercise price of options
      granted equaled the fair market value of the underlying stock at the date of
      grant.





For
      the
      years ended December 31, 2007 and 2006, stock-based compensation was
      approximately $1,401,000 and $468,000 respectively. In fiscal 2007, stock option
      expense was approximately $162,000 for research and development, $982,000 in
      general and administration and $257,000 in sales and marketing. In fiscal 2006,
      stock option expense was approximately $18,000 in research and development,
      $450,000 in general and administrative and $0 in sales and marketing.





At
      December 31, 2007, the Company has one stock-based employee compensation plan
      (the “Option Plan"), which is described more fully in Note 7 of the consolidated
      financial statements.





The
      fair
      value of options granted were estimated at the date of grant using a
      Black-Scholes option-pricing model which includes several variables including
      expected life, risk free interest rate, expected stock price volatility, stock
      option exercise patterns and expected dividend yield. The Company also must
      estimate forfeitures for employee stock options. The following average
      assumptions were used to value non-employee options in the past two
      years:




2007
              
              2006Expected
                  life
              
              
              5
                  years
              
              
              5
                  yearsRisk-free
                  interest rate
              
              
              4.10
              %
              
              4.63
              %Expected
                  volatility
              
              
              138
              %
              
              230
              %Expected
                  dividend yield
              
              
              0
              %
              
              0
              %




Management
      used the following assumptions to value employee options over the past two
      years:




2007
              
              2006Expected
                  life
              
              
              5
                  years
              
              
              5
                  yearsRisk-free
                  interest rate
              
              
              4.00
              %
              
              5.13
              %Expected
                  volatility
              
              
              138
              %
              
              220
              %Expected
                  dividend yield
              
              
              0
              %
              
              0
              %




48




In
      addition to the above, management estimated the forfeitures on employee options
      under the Option Plan would have negligible effects because such forfeitures
      would be a very small percentage. Management believes that options granted
      have
      been to a group of individuals that have a high desire to see the Company
      succeed and have aligned themselves to that end.





The
      expected lives used in the calculations were selected by management based on
      past experience, forward looking profit forecasts and estimates of what the
      trading price of the Company’s stock might be at different future dates.
      Risk-free interest rates used are the 5-year U.S. Treasury rate as published
      for
      the applicable measurement dates.





Volatility
      is a calculation based on the Company’s stock price and volume as calculated
      since the beginning of the Successor Company and becomes a risk-measurement
      component included in the Black-Scholes calculation of estimated fair value.
      Management computed and tested its volatility calculation for reasonableness
      and
      found it to be acceptable based on a number of factors including the Company’s
      current market capitalization, comparisons to other companies similar to
      SpectraScience, Inc. and the current development stage of the
      Company.





*Patents*





The
      Company accounts for acquired intangible assets under SFAS No. 142, “Goodwill
      and Other Intangible Assets” (“SFAS 142”). On August 2, 2004, at the inception
      of the Successor Company, the Company capitalized $290,000 to value eight
      WavSTAT System patents. On November 6, 2007, coincident with the acquisition
      of
      the LUMA assets, the Company capitalized an additional $3,226,000 to value
      the
      28 patents acquired. In both cases, the capitalized amounts were determined
      based upon a market-based forecast approach which utilized comparable assumed
      royalty revenue streams over several possible scenarios. These forecast cash
      flows were then discounted to present value to determine valuation.





All
      patents are amortized over the shorter of their remaining legal lives or
      estimated economic lives. When acquired, the WavSTAT Sytem patents had an
      average remaining useful life of 14 years, while the LUMA patents had an average
      remaining life of approximately 16 years. Amortization expense associated with
      patents for the fiscal years ended December 31, 2007 and 2006 was $53,945 and
      $19,564, respectively. Patents are reported net of accumulated amortization
      of
      $100,883 and $46,938 at December 31, 2007 and 2006, respectively. Amortization
      expense in each of the five years subsequent to December 31, 2007 is expected
      to
      approximate $250,000 per year.




*Research
      and Development*




Research
      and development costs are expensed as incurred. There may be cases in the future
      where certain research and development costs such as software development costs
      are capitalized. For the years ended December 31, 2007 and 2006, research and
      development costs were $796,944 and $406,300, respectively.





*Inventories*





Inventories
      are valued at the lower of cost (using the first-in, first-out method), market
      value or estimated fair value. Costs capitalized in finished goods include
      direct material, labor and overhead.




49




*Fixed
      Assets*





Fixed
      assets are stated at cost less accumulated depreciation. Depreciation expense
      is
      computed using the straight-line method over the estimated useful lives of
      the
      related assets, which range from two to three years. For the years ended
      December 31, 2007 and 2006, depreciation expense was $3,253 and $6,397,
      respectively. Repairs and maintenance are charged to expense as incurred while
      improvements are capitalized. Upon the sale, retirement or disposal of fixed
      assets, the accounts are relieved of the cost and the related accumulated
      depreciation with any gain or loss recorded to the consolidated statements
      of
      operations. The fixed asset account balance includes approximately $924,000
      of
      LUMA equipment. The LUMA equipment will be depreciated at the time the machines
      are placed into service.





*Fair
      Value of Financial Instruments*





The
      carrying amount of the Company's cash and cash equivalents, accounts payable
      and
      accrued liabilities approximate their estimated fair values due to the
      short-term maturities of those financial instruments.





*Long-Lived
      Assets*





SFAS
      No.144 “Accounting for the Impairment or Disposal of Long-Lived Assets”,
      addresses financial accounting and reporting for the impairment or disposal
      of
      long-lived assets. SFAS 144 requires that long-lived assets be reviewed for
      impairment whenever events or changes in circumstances indicate that their
      carrying amounts may not be recoverable. If the cost basis of a long-lived
      asset
      is greater than the projected future undiscounted net cash flows from such
      asset, an impairment loss is recognized. Impairment losses are calculated as
      the
      difference between the cost basis of an asset and its estimated fair value.
      SFAS
      144 also requires companies to separately report discontinued operations and
      extends that reporting requirement to a component of an entity that either
      has
      been disposed of (by sale, abandonment or in a distribution to owners) or is
      classified as held for sale. Assets to be disposed of are reported at the lower
      of the carrying amount or the estimated fair value less costs to sell. The
      Company adopted SFAS 144 on January 1, 2002. The provisions of this
      pronouncement relating to assets held for disposal generally are required to
      be
      applied prospectively after the adoption date to newly initiated commitments
      to
      sell or dispose of such assets, (as defined), by management. As a result, the
      Company cannot determine the potential effects that adoption of SFAS 144 will
      have on the Company's consolidated financial statements with respect to future
      disposal decisions, if any. The Company believes no impairment exists at
      December 31, 2007.





*Earnings
      (Loss) Per Share*





Under
      SFAS No. 128 "Earnings Per Share", basic earnings (loss) per share is computed
      by dividing net income (loss) available to common stockholders by the weighted
      average number of common shares assumed to be outstanding during the period
      of
      computation. Diluted earnings per share is computed similar to basic earnings
      per share except that the denominator is increased to include the number of
      additional common shares that would have been outstanding if the potential
      common shares had been issued and if the additional common shares were dilutive.
      For all periods presented, basic and diluted loss per share are the same, as
      any
      additional common stock equivalents would be antidilutive. Potentially dilutive
      shares of common stock that have been excluded from the calculation of the
      weighted average number of dilutive common shares. For the year ended December
      31, 2007, there were 11,486,658 additional potentially dilutive shares of common
      stock. These additional shares include the common stock equivalent effect of
      outstanding warrants, vested options, assumed preferred stock conversions and
      preferred stock warrant conversions. For the year ended December 31, 2006,
      there
      were 2,330,000 additional potentially dilutive shares of common stock due
      primarily to the effect of outstanding vested stock options.




50




*Income
      Taxes*





Income
      taxes are provided for the tax effects of transactions reported in the
      consolidated financial statements and consist of taxes currently due plus
      deferred income taxes. Deferred income taxes are recognized for temporary
      differences between the financial statement and tax bases of assets and
      liabilities that will result in taxable or deductible amounts in the future.
      Deferred income taxes are also recognized for net operating loss carryforwards
      that are available to offset future taxable income and research and development
      credits. Valuation allowances are established when necessary to reduce deferred
      tax assets to the amount expected to be realized.





In
      July
      2006, the Financial Accounting Standards Board issued Financial Interpretation
      No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes”, which applies
      to all tax positions related to income taxes subject to SFAS 109, “Accounting
      for Income Taxes”. FIN 48 requires a new evaluation process for all tax
      positions taken. If the probability for sustaining said tax position is greater
      than 50%, then the tax position is warranted and recognition should be at the
      highest amount which would be expected to be realized upon ultimate settlement.
      FIN 48 requires expanded disclosure at each annual reporting period unless
      a
      significant change occurs in an interim period. Differences between the amounts
      recognized in the statements of financial position prior to the adoption of
      FIN
      48 and the amounts reported after adoption are to be accounted for as an
      adjustment to the beginning balance of retained earnings. The Company has
      completed its initial evaluation and implementation of the impact of the January
      1, 2007 adoption of FIN 48 and determined that the Company does not have
      uncertain tax positions on its 2003, 2004, 2005 and 2006 tax returns. Based
      on
      evaluation of the 2007 transactions and events, the Company does not have any
      uncertain tax positions that require measurement. Because the Company had a
      full
      valuation allowance on its deferred tax assets as of December 31, 2007 and
      2006, the Company has not recognized any tax benefits since inception. The
      implementation of FIN 48 did not have a material impact on the Company’s
      financial condition, consolidated results of operation or consolidated cash
      flows.





Our
      policy is to recognize interest and/or penalties related to income tax matters
      in income tax expense. We had no accrual for interest or penalties on our
      consolidated balance sheets at December 31, 2007 or 2006, and have not
      recognized interest and/or penalties in the consolidated statement of operations
      for the year ended December 31, 2007.





We
      are
      subject to taxation in the US and the state of California. All of our tax years
      are subject to examination by the US and California tax authorities due to
      the
      carryforward of unutilized net operating losses.




*Recent
      Accounting Pronouncements*





In
      September 2006, the Financial Accounting Standards Board, or FASB, issued SFAS,
      No. 157, “Fair Value Measurement” (“SFAS 157”). SFAS 157 established a framework
      for measuring fair value in accordance with GAAP, clarifies the definition
      of
      fair value within that framework, and expands disclosures about the use of
      fair
      value measurements. It also responds to investors’ requests for expanded
      information about the extent to which companies measure assets and liabilities
      at fair value, the information used to measure fair value and the effect of
      fair
      value measurements on earnings. SFAS 157 applies whenever other standards
      require (or permit) assets or liabilities to be measured at fair value, and
      does
      not expand the use of fair value in any new circumstances. SFAS 157 is effective
      for financial statements issued for fiscal years beginning after November 15,
      2007. Management is currently assessing the impact, if any, that SFAS 157 may
      have on the Company.




51




In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option
      for Financial Assets and Financial Liabilities — Including an amendment of FASB
      Statement No. 115” (“SFAS 159”). This statement permits, but does not
      require, entities to measure many financial instruments at fair value. The
      objective is to provide entities with an opportunity to mitigate volatility
      in
      reported earnings caused by measuring related assets and liabilities differently
      without having to apply complex hedge accounting provisions. Entities electing
      this option will apply it when the entity first recognizes an eligible
      instrument and will report unrealized gains and losses on such instruments
      in
      current earnings. This statement (1) applies to all entities, (2) specifies
      certain election dates, (3) can be applied on an instrument-by-instrument
      basis with some exceptions, (4) is irrevocable, and (5) applies only
      to entire instruments. One exception is demand deposit liabilities which are
      explicitly excluded as qualifying for fair value. With respect to SFAS 115,
      available-for-sale and held-to-maturity securities at the effective date are
      eligible for the fair value option at that date. If the fair value option is
      elected for those securities at the effective date, cumulative unrealized gains
      and losses at that date shall be included in the cumulative-effect adjustment
      and thereafter, such securities will be accounted for as trading securities.
      SFAS 159 will be effective for the Company on January 1, 2008. The Company
      is currently reviewing the fair value option that is permitted, but not
      required, under SFAS 159.





In
      December 2007, the FASB issued SFAS No. 160, “Accounting and Reporting of
      Noncontrolling Interest in Consolidated Financial Statements, an amendment
      of
      ARB No. 51”, (“SFAS 160”). SFAS 160 will significantly change the accounting for
      and reporting of non-controlling (minority) interests in consolidated financial
      statements. SFAS 160 is effective for the first annual reporting period
      beginning on or after December 15, 2008. Earlier adoption is prohibited.
      Management does not expect the adoption of SFAS 160 will have a material impact
      on the Company’s consolidated results of operations or financial
      position.





In
      December 2007, the FASB issued No. 141(R), “Business Combinations” (“SFAS
      141(R)”). SFAS 141(R) replaces SFAS 141 and provides greater consistency in the
      accounting and financial reporting of business combinations. SFAS 141(R)
      requires the acquiring entity in a business combination to recognize all assets
      acquired and liabilities assumed in the transaction and any non-controlling
      interest in the acquiree at the acquisition date and be measured at the fair
      value as of that date. This includes the measurement of the acquirer’s shares
      issued in consideration for a business combination, the recognition of
      contingent consideration, the accounting for pre-acquisition gain and loss
      contingencies, the recognition of capitalized in-process research and
      development, the accounting for acquisition related restructuring cost accruals,
      the treatment of acquisition related transaction costs and the recognition
      of
      changes in the acquirer’s income tax valuation allowance and deferred taxes.
      SFAS 141(R) will be effective for the Company on January 1, 2009 and is to
      be applied prospectively. Early adoption is not permitted. Management is
      currently assessing the impact, if any, that SFAS 141(R) may have on the
      Company.





In
      November 2007, the Emerging Issues Task Force (EITF) ratified a consensus on
      EITF Issue No. 07-1, “Accounting for Collaborative Arrangements” (“EITF
      07-1”), which requires participants in a collaboration to make separate
      disclosures regarding the nature and purpose of an arrangement, their rights
      and
      obligations under the arrangement, the accounting policy for the arrangement
      and
      the income statement classification and amounts arising from the arrangement
      between participants for each period an income statement is presented. EITF
      07-1
      is effective beginning in the first quarter of fiscal year 2009. Management
      is
      currently evaluating the impact of the provisions of EITF 07-1 on the Company’s
      consolidated financial position, results of operations and cash flows and
      therefore, the impact of the adoption is unknown at this time.




52




In
      June
      2007, the EITF ratified a consensus on EITF Issue No. 07-3, “Accounting for
      Non-Refundable Advance Payments for Goods or Services to Be Used in Future
      Research and Development Activities” (“EITF 07-3”), which concluded that
      non-refundable advance payments for goods or services for use in research and
      development activities should be deferred and capitalized. EITF 07-3 is
      effective for us beginning in the first quarter of fiscal year 2008. Management
      is currently evaluating the impact of the provisions of EITF 07-3 on the
      Company’s consolidated financial position, results of operations and cash flows
      and therefore, the impact of the adoption is unknown at this time.





Other
      accounting standards that may have been issued or proposed by the FASB or other
      standards-setting bodies are not expected to have a material impact on the
      Company’s consolidated financial statements.





Note
      4:
      Inventories





Inventories
      consisted of the following at December 31, 2007 and 2006,
      respectively:





December
                31,2007
            
            2006Raw
                Materials
            
            $
            986,740
            
            $
            50,876Finished
                Goods
            
            
            58,116
            
            
            73,105Total
                inventories
            
            $
            1,044,856
            
            $
            123,981




Note
      5:
      Income Taxes





The
      significant components of deferred tax assets as of December 31, 2007 and 2006
      are shown below. A valuation allowance has been established to offset the
      deferred tax assets, as realization of such assets is uncertain.





Year
                Ended
              December
                31, 2007
            
            Year
                Ended
              December
                31, 2006Deferred
                tax assets:Net
                operating loss carryforward
            
            $
            10,350,300
            
            $
            11,480,000Research
                and development credits
            
            
            565,200
            
            
            537,000Stock
                compensation
            
            
            831,700
            
            
            277,000Accrued
                liabilities and other
            
            
            17,600
            
            
            15,000Total
                deferred tax assets
            
            
            11,764,800
            
            
            12,309,000Valuation
                allowance
            
            
            (9,687,800
            )
            
            (12,213,000
            )Net
                deferred tax assets
            
            
            2,077,000
            
            
            96,000Deferred
                tax liabilities:Acquired
                intangibles
            
            
            (89,000
            )
            
            (96,000
            )Luma
                asset acquisition with common stock
            
            
            (1,988,000
            )Total
                deferred tax liabilities
            
            
            (2,077,000
            )
            
            (96,000
            )Net
                deferred taxes
            
            $
            -
            
            $
            -




53




The
      following reconciles the tax provision with the expected provision obtained
      by
      applying statutory rates to pretax income:





Year
                Ended December 31, 2007
            
            Year
                Ended December 31, 2006Amount
            
            %
                of Pretax Income
            
            Amount
            
            %
                of Pretax IncomeIncome
                tax at federal statutory rate
            
            $
            (1,011,000
            )
            
            34.0
            %
            $
            (446,000
            )
            
            34.0
            %State
                tax provision, net of federal tax benefit
            
            
            (174,000
            )
            
            5.8
            
            
            (57,000
            )
            
            4.3Nondeductible
                differences
            
            
            22,000
            
            
            (.70
            )
            
            13,000
            
            
            (1.0
            )Tax
                credits
            
            
            (23,000
            )
            
            0.8
            
            
            (12,000
            )
            
            0.9Change
                in valuation allowance
            
            
            1,180,000
            
            
            (39.7
            )
            
            498,000
            
            
            (38.0
            )Other
            
            
            6,000
            
            
            (0.2
            )
            
            4,000
            
            
            (0.3
            )Provision
                for income taxes
            
            $
            -
            
            
            0.0
            %
            $
            -
            
            
            0.0
            %





At
      December 31, 2007, the Company had Federal net operating loss carry-forwards
      of
      approximately $25,710,000 that expire from 2008 through 2027. During 2007,
      the
      Company had federal net operating losses of approximately $4,717,000
      expire.  In addition, the **** Company
      had  research
      and development tax credits of approximately $553,000 that expire from 2012
      through 2027. As a result of previous stock transactions, the Company's ability
      to utilize its net operating loss carryforwards to offset future taxable income
      and utilize future research and development tax credits is subject to certain
      limitations under Section 382 and Section 383 of the Internal Revenue Code
      due
      to changes in equity ownership of the Company.





The
      Company is currently analyzing its net operating losses, but is still in the
      process of collecting data. When this analysis is finalized, the Company plans
      to update tax positions under FIN 48 . Due to the existence of the valuation
      allowance, future changes in our unrecognized tax benefits will not impact
      our
      effective tax rate.





Note
      6:
      Lease Commitment





The
      Company leases its principal facility from an unrelated third party. The
      facility consists of approximately 5,080 square feet of office, research and
      development, manufacturing, quality testing, and warehouse space. The lease
      provides for monthly rental payments of $5,842 through December 2008. Total
      commitment under this lease for 2008 is approximately $70,000. For the years
      ended December 31, 2007 and 2006, rent expense totaled $43,300 and $32,624,
      respectively.





Note
      7:
      Stock-Based Compensation Plans





The
      2001
      stock option plan (the “Option Plan”) was amended in 2004. The Option Plan
      provides for the grant of incentive stock options (“ISOs") to our full-time
      employees (who may also be Directors) and nonqualified stock options ("NSOs")
      to
      non-employee directors, consultants, customers, vendors or providers of
      significant services and expires on January 30, 2011. The exercise price of
      any
      ISO may not be less than the fair market value of the common stock on the date
      of grant and the term shall not exceed ten years. The amount reserved under
      the
      Plan shall equal 15% of the outstanding shares of the Company totaling 8,848,942
      at December 31, 2007. At December 31, 2007, the Company had granted 5,795,000
      options under the Plan (3,345,000 of which are exercisable), with 3,053,942
      available for future issuance.




54




Options
      outstanding that have vested and are expected to vest as of December 31, 2007
      are as follows:





Number
                of Shares
            
            Weighted
                Average Exercise Price
            
            Weighted
                Average Remaining Contractual Term in Years
            
            Aggregate
                Intrinsic
              Value
                (1)Vested
            
            
            3,345,000
            
            $
            0.56
            
            
            7.91
            
            $
            1,616,050Expected
                to vest
            
            
            2,450,000
            
            $
            0.91
            
            
            5.49
            
            
            318,500Total
            
            
            5,795,000
            
            
            
            
            
            
            
            $
            1,934,550




(1)
      These
      amounts represent the difference between the exercise price and $1.04, the
      closing market price of the Company’s common stock on December 31, 2007 as
      quoted on the Over-the-Counter Board under the symbol “SCIE.OB”.





Additional
      information with respect to stock option activity is as follows:




Outstanding
                OptionsOptions
                Available For Grant
            
            Plan
                Options Outstanding
            
            Weighted
                Average Exercise Price Per Share
            
            Weighted-Average
                Remaining Contractual Term (years)
            
            Aggregate
                Intrinsic Value (1)August
                2, 2004
            
            
            4,132,614
            
            
            1,500,000
            
            $
            0.15Options
                granted
            
            
            (275,000
            )
            
            275,000
            
            $
            0.40Options
                exercised
            
            
            -
            
            
            -December
                31, 2004
            
            
            3,857,614
            
            
            1,775,000
            
            $
            0.19Options
                granted
            
            
            (225,000
            )
            
            225,000
            
            $
            0.94Options
                exercised
            
            
            -
            
            
            (21,500
            )
            $
            0.15December
                31, 2005
            
            
            3,632,614
            
            
            1
                ,978,500
            
            $
            0.28Options
                granted
            
            
            (400,000
            )
            
            400,000
            
            $
            1.09Options
                exercised
            
            
            48,500
            
            
            (48,500
            )
            $
            0.15December
                31, 2006
            
            
            3,281,114
            
            
            2,330,000
            
            $
            0.42Grants
            
            
            (3,552,000
            )
            
            3,552,000
            
            $
            0.89Exercises
            
            
            10,000
            
            
            (10,000
            )
            $
            0.15Cancellations
            
            
            77,000
            
            
            (77,000
            )
            $
            0.85Additional
                options authorized
            
            
            3,237,828
            
            
            -December
                31, 2007
            
            
            3,053,942
            
            
            5,795,000
            
            $
            0.70
            
            
            8.63
            
            $
            1,934,550Exercisable
                December 31, 2007
            
            
            
            
            
            3,345,000
            
            $
            0.56
            
            
            7.91
            
            $
            1,616,050




55




The
      total
      intrinsic value of options exercised during the years ended December 31, 2007
      and 2006 was $10,700 and $60,815, respectively. At December 31, 2007, total
      unrecognized estimated employee compensation cost related to non-vested stock
      options granted prior to that date was $1,377,590, which is expected to be
      recognized over 1.4 years.





For
      the
      fiscal year ended December 31, 2007, the Company granted stock options to
      purchase 2,341,667 common shares to employees and directors. At the time of
      grant, those options were estimated to have an aggregate fair value of
      approximately $2,005,000. For the fiscal year ended December 31, 2006, the
      Company granted stock options to purchase 400,000 common shares to a director.
      At the time of grant, this option was estimated to have an aggregate fair value
      of $474,000.





Note
      8:
      Undesignated Capital Stock





The
      Company authorized 25,000,000 of undesignated shares of capital stock with
      undesignated par value. On June 12, 2007, the Company’s Articles of
      Incorporation were amended to designate 2,250,000 of the Company’s undesignated
      capital stock as Series A Convertible Preferred Stock (the “Preferred”) with par
      value of $0.01 per share. On December 31, 2007 there remained 22,750,000
      undesignated shares of capital stock. The undesignated stock may be issued
      in
      one or more series as determined from time to time by the Board of Directors.
      Any series authorized for issuance by the Board of Directors may be senior
      to
      the common stock with respect to any distribution if so designated by the Board
      of Directors upon issuance of the shares of that series. The Board of Directors
      are granted the express authority to fix by resolution any other designations,
      powers, preferences, rights (including voting rights), qualifications,
      limitations or restrictions with respect to any particular series created from
      the undesignated stock prior to issuance thereof.





Note
      9:
      Equity Transactions





*Common
      Stock*





In
      June
      2006, the Company issued 749,325 shares of common stock at a price of $0.67
      per
      share to accredited investors for $502,048 in cash. This transaction was exempt
      from registration pursuant to Regulation D promulgated under the Securities
      Act
      of 1933. Additionally, during 2006, an employee exercised options to acquire
      48,500 common shares for an aggregate purchase price of $7,275.





From
      March through June of 2007, an employee exercised stock options to acquire
      10,000 common shares for an aggregate exercise price of $1,500.





From
      March through May of 2007, the Company issued 2,270,000 shares of common stock
      at a price of $0.50 per share to accredited investors for $1,135,000 in cash.
      This transaction was exempt from registration pursuant to Regulation D
      promulgated under the Securities Act of 1933.





In
      November 2007, the Company issued 11,200,000 shares of common stock to
      accredited investors in exchange for the assets of LUMA. The price was based
      upon the value of the underlying assets received which totaled approximately
      $5,025,000, or $0.45 per share. This transaction was exempt from registration
      pursuant to Section 4(2) of the Securities Act of 1933.





In
      December 2007, the Company issued 7,142,857 shares of common stock to accredited
      investors at a price of $0.70 per share for an aggregate consideration of
      $5,000,000 in an initial closing a part of an ongoing private equity financing
      (the “Financing”). The Company received net cash proceeds of approximately
      $4,379,000 after placement agent commissions and expenses of $600,000 and other
      transaction expenses of approximately $21,000. This sale represents the initial
      tranche on an ongoing private stock offering, which the Company anticipates
      will
      have a final closing (“Closing”) on or about March 31, 2008. The Company is
      obligated to file a registration statement with the SEC for these common shares
      within 60 days of the Closing and to use its best efforts to have such
      registration statement effective 180 days from the Closing. In the event that
      the Company does not have an effective registration statement in place within
      180 days from the Closing, the Company is required to pay liquidated damages
      in
      an amount equal to 1% of the aggregate purchase price paid by the subscribers
      for each 30-day period in which the Company remains in default under this
      provision. In no event, however, can the aggregate liquidated damage amount
      exceed 6% of the aggregate purchase price paid by the investors. This
      transaction was exempt from registration pursuant to Regulation D promulgated
      under the Securities Act of 1933.




56




*Warrants*





In
      December 2007, as additional consideration associated with the Financing, the
      Company issued 714,285 five-year warrants to purchase an equal number of common
      shares at $0.80 per share to Advanced Equities, Inc., the placement agent
      associated with the Financing. The Company is obligated to reserve 714,285
      common shares under these warrants and the shares underlying the warrants are
      subject to the same registration requirements as the common shares sold in
      the
      private placement financing.





*Preferred
      Stock and Warrants*





On
      June
      12, 2007, the Company’s Articles of Incorporation were amended to designate
      2,250,000 of the Company’s undesignated capital stock as Series A Convertible
      Preferred Stock (the “Preferred”) with par value $0.01 per share. At issuance,
      the Preferred is convertible into an equal number of shares of the Company’s
      common stock based upon an initial conversion price of $.50 per share and
      carries a liquidation preference of like amount. On December 31, 2007, the
      Preferred conversion price reset to $0.125 per share based upon the inability
      of
      the Company to attain certain revenue levels through that date. In addition,
      the
      Preferred has rights which provide for (i) dividend payments senior to those
      with respect to common shares, (ii) voting rights equal to the number of common
      shares into which the Preferred is convertible, (iii) automatic conversion
      in
      the event either of an underwritten public offering exceeding $30 million in
      gross proceeds to the Company at an offering price in excess of $2.00 per share
      or approval of 67% of the Preferred holders and (iv) adjustments to the
      conversion price in the event of stock dividends, stock splits or other
      effective stock subdivisions. If the Company declares a dividend or a
      distribution on any common stock of the Company, the Company shall pay a
      dividend or make a distribution on all outstanding shares of Preferred in an
      amount per share equal to the maximum amount paid or set aside for all shares
      of
      common stock into which each such share of Preferred could then be converted.
      On
      June 15, 2007, the Company sold 2,000,000 shares of its Preferred, to three
      accredited investors for gross proceeds of $1,000,000 in cash. As additional
      consideration for the purchase of the Preferred, the Company issued five-year
      warrants to purchase 250,000 additional shares of Preferred at an initial
      exercise price of $0.50 per share. The Company is also required to reserve
      250,000 shares of Preferred for issuance in relation to the
      warrants.





The
      convertible feature of the Preferred and the terms of the warrants provide
      for a
      rate of conversion or exercise that was below market value at issuance. Such
      feature, as it specifically relates to the convertible feature of the Preferred,
      is characterized as a "Beneficial Conversion Feature" ("BCF"). Pursuant to
      EITF
      Issue No. 98-5, "Accounting for Convertible Securities with Beneficial
      Conversion Features or Contingently Adjustable Conversion Ratios" (“EITF 98-5”)
      and EITF No. 00-27, "Application of EITF Issue No. 98-5 to Certain Convertible
      Instruments," the estimated relative fair values of the Preferred and the
      warrants, in approximate amounts of $782,000 and $218,000, respectively, were
      calculated assuming the most favorable conversion price determinable to the
      Preferred shareholders. The value of the BCF was determined by the intrinsic
      value method and the fair value of the warrants was determined by the
      Black-Scholes option-pricing model at the date of issuance. The warrant fair
      value was determined assuming a five-year term, stock volatility of 140%, and
      a
      risk-free interest rate of 5.10%. The stand-alone fair value of the BCF was
      determined to be substantially higher than the proceeds received and,
      accordingly, the value assigned to the BCF was limited to the gross proceeds
      received from the offering. Per the guidance of EITF 98-5, the value of the
      BCF
      and warrants are treated as a deemed dividend to the Preferred stockholders
      and,
      due to the potential immediate convertibility of the Preferred stock at
      issuance, is recorded as an increase to both additional paid-in-capital and
      deficit accumulated during the development stage at the time of
      issuance.




57




Note
      10:
      Related Party Transactions





In
      June
      2007, a director of the Company, Mr. John Pappajohn, coincident with his
      becoming a director purchased $925,000 of the Company’s Series A Preferred
      Stock. As an inducement to engage in the Preferred transaction Mr. Pappajohn
      also received 213,250 warrants to purchase an equal number of Preferred shares
      at a conversion price of $0.50 per share. Also coincident with becoming a
      director, Mr. Pappajohn was granted a stock option to purchase 400,000 shares
      of
      common stock at an exercise price of $1.10 which, at the time of grant, was
      determined to have a fair value of approximately $394,000. On December 31,
      2007,
      Mr. Pappajohn invested an additional $383,000 and purchased 547,142 shares
      of
      unregistered common stock as a part of the initial closing of the Company’s
      Regulation D private placement offering. Subsequent to December 31, 2007, and
      pursuant to the terms of the Certificate of Designation of the Series A
      Preferred Stock, Mr. Pappajohn and related entities converted Preferred Stock
      into 8,000,000 shares of restricted common stock.





In
      November 2007, coincident with the Company’s purchase of the assets of Luma
      Imaging Corporation for 11,200,000 shares of common stock, the related entities
      of Euclid SR Partners, LP, Euclid SR Biotechnology Partners LP and Euclid
      Partners IV, LP (“Euclid”) received 9,968,000 of the restricted common stock
      shares issued. This stock had an estimated fair value of $4,984,000 at the
      time
      of acquisition. On December 31, 2007, Euclid purchased an additional 357,142
      shares of common stock for $250,000 as a part of the initial closing of the
      Company’s Regulation D private placement offering.





Note
      11:
      License Agreement





The
      Company is the exclusive licensee through the Massachusetts General Hospital
      of
      US Patent number 5,843,000 entitled, “Optical Biopsy Forceps and Method of
      Diagnosing Tissue” and a pending international patent application. This license
      agreement requires a royalty be paid on sales of the patent on products using
      claims described within the patent under the license. At December 31, 2007,
      no
      revenues have been generated from sales of products using this
      patent.





Note
      12:
      Subsequent Events





*Private
      Placement Financing*





From
      January 1, 2008 through March 27, 2008, the Company sold 615,836 restricted
      shares of common stock to accredited investors at a price of $0.70 per share
      for
      an aggregate consideration of $430,770 in the continuation of the Financing.
      The
      Company received net cash proceeds of approximately $388,000 after placement
      agent commissions and expenses. It is anticipated that the Company may sell
      additional shares prior to the Closing of the transaction, which is expected
      to
      take place on March 31, 2008. The Company is obligated to file a registration
      statement with the SEC for these common shares within 60 days of the Closing
      and
      to use its best efforts to have such registration statement effective 180 days
      from the Closing. This transaction was exempt from registration pursuant to
      Regulation D promulgated under the Securities Act of 1933.




58




Additionally,
      as a consequence of the common stock sale noted immediately above, the Company
      will be obligated to issue five-year warrants to purchase 61,584 restricted
      common shares at $0.80 per share to Advanced Equities, Inc., the placement
      agent
      associated with the Financing. The Company is required to reserve 61,584 common
      shares under these warrants and the shares underlying the warrants are subject
      to the same registration requirements as the common shares sold in the private
      placement financing.





*Conversion
      of Series A Convertible Preferred Stock*





On
      March
      27, 2008, pursuant to the terms of the Certificate of Designation of the
      Relative Rights and Preferences of the Series A Preferred Stock, the holders
      of
      2,000,000 shares of Preferred Stock converted their shares into 8,000,000
      restricted shares of the Company’s common stock.





ITEM
      8.
      CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE.





During
      2006 and 2007, there were no changes or disagreements with our current
      Independent Registered Public Accounting Firm, J.H. Cohn LLP.





ITEM
      8A.
      DISCLOSURE CONTROLS AND PROCEDURES.





*Evaluation
      of Disclosure Controls and Procedures*





Under
      the
      supervision and with the participation of our management, including our Chief
      Executive Officer and Chief Financial Officer, we evaluated the effectiveness
      of
      the design and operation of our disclosure controls and procedures (as defined
      in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered
      by
      this report (the “Evaluation Date”). Based on that evaluation, the Chief
      Executive Officer and Chief Financial Officer concluded that our disclosure
      controls and procedures were effective.





*Changes
      in Internal Control over Financial Reporting*





Under
      the
      supervision and with the participation of our management, including our Chief
      Executive Officer and Chief Financial Officer, we evaluated any changes to
      our
      internal control over financial reporting (as defined in Rule 13a-15(f) under
      the Exchange Act) which occurred during the quarter ended December 31, 2007.
      Based on that evaluation, the Chief Executive Officer and Chief Financial
      Officer concluded that there were no changes in the Company’s internal controls
      over financial reporting during the quarter ended December 31, 2007 which have
      materially affected, or are likely to materially affect our internal controls
      over financial reporting.





*Cautionary
      Statement*





A
      control
      system, no matter how well-designed and operated, cannot provide absolute
      assurance that the objectives of the control system are met, and no evaluation
      of internal controls can provide absolute assurance that all control issues
      and
      instances of fraud, if any, within a company have been detected.




59




ITEM
      8A(T). INTERNAL CONTROL OVER FINANCIAL REPORTING.





*Evaluation
      of Internal Control Over Financial Reporting*





Under
      the
      supervision of and with the participation of our management, including our
      Chief
      Executive Officer, and Chief Financial Officer, we performed an evaluation
      of
      the Company’s internal controls over financial reporting as per the requirements
      of Section 404 of the Sarbanes-Oxley Act (“SOX”) for non-accelerated filers.
      Management understands that it is its responsibility to establish and maintain
      adequate internal control over financial reporting for the Company. Management
      assessed the processes related to and the systems of internal control over
      financial reporting and determined that, in combination with mitigating
      corporate controls, the Company’s internal control over financial reporting is
      adequate to minimize the risk of a material misstatement on the financial
      statements at December 31, 2007.





Management
      identified and analyzed material financial statement accounts and their
      associated relevant business processes in first performing a financial risk
      assessment, then an entity-level risk assessment and, finally, an information
      technology risk assessment.





·
            The
                Financial Risk assessment segmented the different financial control
                processes (for example, the financial reporting, inventory management
                and
                purchasing processes) against material real and nominal financial
                accounts
                to determine which processes might imply the highest risk of financial
                statement misstatement. Then management reviewed and vetted the high-risk
                processes.





·
            The
                Entity-Level risk assessment reviewed such controls utilizing the
                COSO
                (Committee of Sponsoring Organizations of the Treadway Commission)
                control
                framework.





·
            The
                Information Technology risk assessment reviewed the primary computer
                systems which effect the reporting of financial information. Management
                reviewed application, database, operating system and network software.
                We
                also reviewed our server, storage, network and desktop hardware
                environment.





As
      a
      result of these assessments, Management found no evidence of any material
      weaknesses in the Company’s internal controls over financial reporting.
      Management has concluded that, at December 31, 2007, internal controls over
      financial reporting were effective.





This
      annual report does not include an attestation report of the Company’s registered
      public accounting firm regarding internal control over its financial reporting.
      Management’s report was not subject to attestation by the Company’s registered
      public accounting firm pursuant to temporary rules of the Securities and
      Exchange Commission that permit the Company to provide only Management’s report
      in this annual report.





*Cautionary
      Statement*





A
      control
      system, no matter how well-designed and operated, cannot provide absolute
      assurance that the objectives of the control system are met, and no evaluation
      of internal controls can provide absolute assurance that all control issues
      and
      instances of fraud, if any, within a company have been detected.




60




ITEM
      8B.
      OTHER INFORMATION.





Not
      Applicable.




61




**PART
      III**





ITEM
      9.
      DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH
      SECTION 16(a) OF THE EXCHANGE ACT.





The
      information required by this item is incorporated by reference to the Company’s
      definitive proxy statement for the annual meeting of shareholders in May
      2008.





ITEM
      10.
      EXECUTIVE COMPENSATION.





The
      information required by this item is incorporated by reference to the Company’s
      definitive proxy statement for the annual meeting of shareholders in May
      2008.





ITEM
      11.
      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS.





*Summary
      of Securities Authorized for Issuance Under Equity Compensation
      Plans*





The
      following table sets forth December 31, 2007 information on our equity
      compensation plans in effect as of that date:





(a)
            
            (b)
            
            (c)Plan
                category
            
            Number
                of securities to be issued upon exercise of outstanding options,
                warrants
                and rights (1)
            
            Weighted-average
                exercise price of outstanding options, warrants and rights
            
            Number
                of securities remaining available for future issuance under equity
                compensation plans (excluding securities reflected in column
                (a))Equity
                compensation plans approved by security holders
            
            
            5,795,000
            
            $
            0.70
            
            
            3,053,942Equity
                compensation plans not approved by security holders
            
            
            0
            
            
            0
            
            
            N/ATotals
            
            
            5,795,000
            
            $
            0.70
            
            
            3,053,942





(1)
      Net
      of equity instruments forfeited, exercised or expired.





*2001
      Amended Stock Option Plan*





Our
      2001
      Amended Stock Option Plan (the "Option Plan") provides for the grant of
      incentive stock options (ISOs") to our employees (who may also be directors)
      and
      nonqualified stock options ("NSOs") to non-employee directors, consultants,
      customers, vendors or providers of significant services. The Option plan expires
      on January 30, 2011. The exercise price of any ISO may not be less than the
      fair
      market value of the common stock on the date of grant and the term shall not
      exceed ten years. The amount reserved under the Option Plan equals 15% of the
      outstanding shares of the Company totaling 8,848,942 at December 31, 2007.
      At
      December 31, 2007, we had had option grants outstanding for 5,795,000 common
      shares under the Plan, with 3,053,942 available for future
      issuance.




62




The
      Company’s Option Plan provides that the number of shares of common stock
      available for issuance under the plan shall always equal 15% of the number
      of
      shares of common stock of the Company issued and outstanding.





The
      rest
      of the information required by this item is incorporated by reference to the
      Company’s definitive proxy statement for the meeting of stockholders in May
      2008.





ITEM
      12.
      CERTAIN RELATIONSHIPS, AND RELATED TRANSACTIONS AND DIRECTOR
      INDEPENDENCE.





The
      information required by this item is incorporated by reference to the Company’s
      definitive proxy statement for the annual meeting of shareholders in May
      2008.





ITEM
      13.
      EXHIBITS





The
      following documents are filed as part of this report on Form
      10-KSB:




Exhibits
      Required by Item 601 of Regulation S-B





Exhibit
                No.
            
            Description3.2
            
            Luma
                Acquisition Agreement (1)3.1
            
            Amended
                and Restated Articles of Incorporation (2)4.1
            
            Certificate
                of Designation Series A Preferred Stock (4)4.2
            
            Series
                A Preferred Stock Warrant (4)4.3
            
            Common
                Stock Purchase Warrant issued to Placement Agent10.27
            
            Amended
                SpectraScience Inc, 2001 Stock Plan (2)10.28
            
            Form
                of Directors’ Option Agreement (3)14
            
            Code
                of Ethics (3)23
            
            Consent
                of Independent Registered Public Accounting Firm31.1
            
            Certification
                of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
                Act of 200231.2
            
            Certification
                of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
                Act of 200232.1
            
            Certification
                of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
                Act of 200232.2
            
            Certification
                of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
                Act of 2002





(1)
            Incorporated
                by reference to the Company’s Report on Form 8-K filed on November 13,
                2007.


(2)
            Incorporated
                by reference to the Company’s Report on Form 8-K filed on August 6,
                2004.


(3)
            Incorporated
                by reference to the Company’s Report on Form 10-KSB for the fiscal year
                ended December 31, 2005, filed on March 31,
                2006.


(4)
            Incorporated
                by reference to the Company’s Report on Form 10-QSB filed on June 30,
                2007.




63




ITEM
      14.
      PRINCIPAL ACCOUNTANT FEES AND SERVICES





The
      information required by this item is incorporated by reference to the Company’s
      definitive proxy statement for the annual meeting of shareholders in May
      2008.





*Policy
      on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services
      of
      Independent Auditor*





Our
      audit
      committee of the Board of Directors is responsible for pre-approving all audits
      and permitted non-audit services to be performed for us by our independent
      auditor.




64




SIGNATURES




Pursuant
      to the requirements of Sections 13 and 15(d) of the Securities Exchange Act
      of
      1934, as amended, the Registrant has duly caused this report to be signed on
      its
      behalf by the undersigned, thereunto duly authorized.




**SpectraScience,
                Inc.**
              **(Registrant)**Date:
                March 28, 2008
            By:
            /s/James
                HitchinJames
                Hitchin-President, Secretary, and Chief Executive
                Officer




Pursuant
      to the requirements of the Securities Exchange Act of 1934, as amended, this
      report has been signed below by the following persons on behalf of the
      Registrant and in the capacities and on the dates indicated.




/s/
                  James Hitchin
              
              March
                  28, 2008James
                  Hitchin
              
              Date(Principal
                  Executive Officer)/s/
                  James Dorst
              
              March
                    28, 2008James
                  Dorst
              
              Date(Principal
                  Financial and Accounting Officer)/s/
                  Mark D. McWilliams
              
              March
                    28, 2008Mark
                  D. McWilliams
              
              DateDirector/s/
                  Rand P. Mulford
              
              March
                    28, 2008Rand
                  P. Mulford
              
              DateDirector/s/
                  John Pappajohn
              
              March
                    28, 2008John
                  Pappajohn
              
              DateDirector/s/
                  Stanley J. Pappelbaum
              
              March
                    28, 2008Stanley
                  J. Pappelbaum
              
              DateDirector/s/
                  Chester E. Sievert
              
              March
                    28, 2008Chester
                  E. Sievert, Jr.
              
              DateDirector/s/
                  Tommy Thompson
              
              March
                    28, 2008Tommy
                  Thompson
              
              DateDirector




65